Managerial Finance
Pre-Test Questions
Course Introduction
Managerial Finance explores the principles and techniques necessary for effective financial management within organizations. The course covers topics such as financial analysis, planning, and control; budgeting; capital structure; and investment decisions. Students will learn how to assess financial statements, manage working capital, evaluate risk and return, and make strategic financing choices to maximize firm value. Emphasizing both quantitative and qualitative skills, the course equips future managers with the knowledge to make sound financial decisions in a rapidly changing business environment.
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) Which of the following need be true for an asset to be considered liquid?
A) It pays regular dividends.
B) It can be bought and sold at an organized stock market or bourse.
C) It is offered for sale on both primary and secondary markets.
D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
E) Buyers and sellers are anonymous.
Answer: D
Q2) It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.
A)True
B)False
Answer: False
Q3) What are the terms for the two types of prices quoted for a stock on an exchange?
Answer: The two quotes associated with a stock quoted on the exchange are bid price and ask price.
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) A firm has ROE of 5.5% and an asset turnover ratio of 1.2.If the firm has 10 dollars in assets per dollar of equity,what is the firm's net profit margin?
A) 1.2%
B) 0.66%
C) 5.5%
D) 6.6%
E) 0.46%
Answer: E
Q2) Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then using the market value of equity,the debt-equity ratio for Luther in 2015 is closest to:
A) 1.71
B) 1.78
C) 2.31
D) 2.35
E) 2.29
Answer: B
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) 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
Q2) If $476 invested today yields $500 in one year's time,what is the discount factor?
A) 0.05
B) 0.95
C) 1.05
D) 1.50
E) 0.24
Answer: B
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Chapter 4: The Time Value of Money
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Q1) 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
Q2) A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV).
A)True
B)False
Q3) The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True
B)False
Q4) If the interest rate is 10%,then which investment(s),if any,would you take and why?
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Chapter 5: Interest Rates
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Sample Questions
Q1) A small foundry agrees to pay $250,000 two years from now to a supplier for a given amount of coking coal.The foundry plans to deposit a fixed amount in a bank account every three months,starting three months from now,so that at the end of two years the account holds $250,000.If the account pays 5.5% APR compounded monthly,how much must be deposited every three months?
A) $29,770
B) $29,777
C) $29,740
D) $31,250
E) $28,077
Q2) Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3,500 and has a net present value (NPV)of $74.26,then the four year risk-free interest rate is closest to:
A) 4.5%
B) 4.58%
C) 4.55%
D) 4.53%
E) 5.0%
Q3) What is a mortgage?
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Page 7
Chapter 6: Bonds
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Q1) The yield to maturity for the three-year zero-coupon bond is closest to:
A) 5.4%
B) 5.8%
C) 5.6%
D) 6.0%
E) 5.0%
Q2) A bond indenture indicates
A) the amounts and dates of all payments to be made.
B) the individual to whom payments will be made.
C) the yield to maturity of the bond.
D) the price of the bond.
E) the bond premium.
Q3) What care,if any,should be taken regarding the sign of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q4) Bonds with a high risk of default generally offer high yields.
A)True
B)False
Q5) How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%,then at what price should this bond trade for?
Page 8
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Chapter 7: Valuing Stocks
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Q1) In an efficient market,investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
Q2) Banco Industries expects sales to grow at a rapid rate over the next three years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.If Banco Industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding,which of the following is the best estimate of Banco's stock price at the start of year 1?
A) $6.03
B) $11.12
C) $12.03
D) $20.11
E) $24.51
Q3) What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?
Q4) What is a major assumption about growth rate in the dividend-discount model?
Q5) What are the major limitations of valuation using multiples?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) If WiseGuy Inc.uses the IRR rule to choose projects,which of the projects will rank highest?
A) Project A
B) Project B
C) Project C
D) Project D
E) Project E
Q2) Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rational for that decision is to
A) invest in project Beta, since NPVB t > 0.
B) invest in project Alpha, since NPVB t < NPVAlph .
C) invest in project Beta, since IRRB t > IRRAlph .
D) invest in project Beta, since NPVB t > NPVAlph > 0.
E) invest in project Alpha, since IRRAlph > IRRB t .
Q3) The profitability index for project B is closest to:
A) 23.34
B) 12.64
C) 0.17
D) 0.12
E) 1.14
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?
A) $48,547
B) $48,000
C) $50,526
D) $35,938
E) $14,400
Q2) What is the ultimate goal of capital budgeting?
Q3) A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?
A) 24,865
B) 30,192
C) 30,204
D) 40,000
E) 44,740
Q4) How do we handle interest expense when making a capital budgeting decision?
Page 11
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Chapter 10: Risk and Return in Capital Markets
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Q1) Why must riskier investments offer higher expected returns?
Q2) What are the two components of realized return from a stock investment?
Q3) Apple computer's stock price jumped when it announced that its revenue had increased because of the successful launch of iPhone and the increased sales of Macintosh computers.This is an example of
A) market risk.
B) unsystematic risk.
C) systematic risk.
D) common risk.
E) unwanted risk.
Q4) Suppose you invested $98 in the Ishares High Yield Fund (HYG)a month ago.It paid a dividend of $0.47 today and then you sold it for $99.What was your dividend yield and capital gains yield on the investment?
A) 0.45%, 1.09%
B) 0.48%, 1.02%
C) 0.48%, 1.08%
D) 1.02%, 1.12%
E) 0.75%, 0.98%
Q5) Which type of investment has historically had the lowest volatility?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and time value of money. A) lower than B) higher than C) similar to D) much lower than E) independent of
Q2) Your portfolio contains $33,000 of CP Rail Stock,which has a beta of 1.3,and $41,000 of Lululemon stock,which has a beta of 1.05.What is the beta of your portfolio?
A) 1.17
B) 1.16
C) 1.18
D) 1.21
E) 1.31
Q3) Correlation is the degree to which the returns of two stocks share common risks.
A)True B)False
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) A firm has $2 million market value and it sells preferred stock with a par value of $100.If the coupon rate on the preferred stock is 8% and the preferred stock trades at $90,what is the cost of preferred stock financing?
A) 8.75%
B) 8.89%
C) 9.21%
D) 9.35%
E) 10.16%
Q2) A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?
A) 5.1%
B) 3.4%
C) 8.5%
D) 8.1%
E) 7.2%
Q3) Should a firm with high retained earnings have a lower cost of equity?
Q4) Between the two models Constant Dividend Growth Model (CDGM)and Capital Asset Pricing Model (CAPM),which is a better method for computation of the cost of equity?
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Page 14
Chapter 13: Risk and the Pricing of Options
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Q1) What effect does volatility of the underlying asset have on the price of the option?
Q2) The ________ side of an options contract has the option to exercise,while the ________ side has an obligation to fulfill the contract.
A) long, long
B) short, long
C) long, short
D) short, short
E) short, other
Q3) How does option pricing theory help explain why equity holders have an incentive to take on negative-NPV,high-volatility investments?
Q4) The writer of a call option has
A) the obligation to sell a security for a given price.
B) the obligation to buy a security for a given price.
C) the right to sell a security for a given price.
D) the right to buy a security for a given price.
E) the long position in the contract.
Q5) What is the short position of an options contract?
Q6) When is an option out-the-money?
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) What is the post-money valuation for the series D funding round?
A) $1.4 million
B) $1.95 million
C) $2.025 million
D) $2.85 million
E) $3.15 million
Q2) An IPO is offered at $14 per share for 6 million shares.The IPO underwriters had a spread of 7.5%.What proceeds did the firm receive from the IPO?
A) $6.3 million
B) $90.3 million
C) $84 million
D) $77.7 million
E) $75 million
Q3) What is the general long-run performance of an IPO?
Q4) What are some of the disadvantages of going public?
Q5) Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the original IPO price.
A)True
B)False
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Chapter 15: Debt Financing
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Sample Questions
Q1) By definition,a corporate bond is any form of debt security.
A)True
B)False
Q2) A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the first coupon payment date?
A) $20 million
B) $25 million
C) $35 million
D) $45 million
E) $145 million
Q3) A callable bond will typically have a(n)________ yield than an otherwise identical bond without a call feature because ________.
A) lower, the firm loses flexibility with a callable bond
B) higher, the firm loses flexibility with a callable bond
C) lower, the option to call a bond is valuable
D) higher, the option to call a bond is valuable
E) identical, the call feature is without value
Q4) Why are bond covenants necessary?
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Chapter 16: Capital Structure
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Questions
Q1) A firm undertakes an investment that is financed with $10,000 of equity and $30,000 of debt.If the return on equity is 14%,the cost of debt is 7% and the tax rate is 25%,what is the firm's WACC?
A) 6.76%
B) 9.92%
C) 7.00%
D) 8.75%
E) 7.44%
Q2) The V in the equation above represents
A) the value of the firm's equity.
B) the market value of the firm's assets.
C) the value of the firm's unlevered equity.
D) the value of the firm's debt.
E) the total value of a levered firm.
Q3) Investment cash flows are independent of financing choices in a
A) market with frictions.
B) perfect capital market.
C) setting with frictions in investment returns.
D) firm with leverage.
E) firm with no leverage.
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Chapter 17: Payout Policy
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Q1) In perfect capital markets,buying and selling securities is a zero-NPV transaction,so retaining cash versus paying it out does not affect firm value.
A)True
B)False
Q2) A firm has $300 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $30 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must he sell to create a homemade dividend of $3900?
A) 33.3 shares
B) 40.2 shares
C) 50.5 shares
D) 60.3 shares
E) 65.6 shares
Q3) What are the different ways a firm can repurchase shares?
Q4) In a stock split or stock dividend,the company issues additional shares rather than cash to its shareholders.
A)True
B)False
Q5) What is the effect on the stock price when a firm repurchases its shares?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) The sustainable growth rate assumes that the firm will raise no new debt financing.
A)True
B)False
Q2) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation equity value of Ideko in 2015 is closest to:
A) $152.8 million
B) $181.7 million
C) $301.7 million
D) $272.8 million
E) $334.8 million
Q3) A firm has $50 million in equity and $20 million in debt,has net income of $10 million and an internal growth rate of 6%.What is the firm's payout ratio?
A) 58%
B) 42%
C) 18%
D) 82%
E) 20%
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
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Chapter 19: Working Capital Management
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Q1) ABX corporation had sales of $47.6 million this year and an average accounts receivable of $6.3 million per day.Its credit terms specify "1/10 net 30." On average,how long does it take to collect on its sales?
A) 7.56 days
B) 12.17 days
C) 18.25 days
D) 21.49 days
E) 48.31 days
Q2) A firm offers its customers 1/10 net 40.What is the cost of trade credit to a customer who chooses to pay on day 40?
A) 12.8%
B) 13.0%
C) 65.5%
D) 96.0%
E) 83.1%
Q3) Working capital alters a firm's value by affecting its free cash flow.
A)True B)False
Q4) What is a firm's operating cycle?
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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) Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?
A) pledging of accounts receivable
B) factoring of accounts receivable with recourse
C) factoring of accounts receivable without recourse
D) floating lien
E) trust receipt
Q3) What are loan origination fees and what effect does it have on the loan?
Q4) Why does a floating lien agreement have a higher interest rate than other types of short-term financing with collateral?
Q5) How can the application of the matching principle increase firm value?
Q6) How does seasonality lead to short-term financing needs?
22
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Chapter 21: Risk Management
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Q1) Which of the following best describes how moral hazard affects the price of insurance?
A) Since insurers can acquire complete information regarding the riskiness of borrowers, they can charge actuarially fair premiums.
B) Since firms may have private information about how risky they are, insurers must raise premiums to compensate for the existence of this uncertainty.
C) Since purchasing insurance reduces the firm's incentive to avoid risk, insurers must raise premiums to compensate for the increase in risk.
D) Since purchasing insurance reduces the firm's risk, insurers can lower premiums to compensate for the reduction in risk.
E) Since high premiums will drive away the low-risk firms, insurers must lower premiums in order to attract low-risk borrowers.
Q2) Two firms can use vertical integration to hedge risks,because an increase in price represents an increase in revenues for one firm,offsetting an increase in costs for the other firm.
A)True
B)False
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23
Chapter 22: International Corporate Finance
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Q1) A Canadian firm is planning to make an investment in the UK.The firm estimates that the project will generate a single cash flow of 1 million GBP after one year.If the one year forward exchange rate is 2.12 CAD/GBP,and the Canadian cost of capital is 5.4%,what is the PV of the project cash flow?
A) $2.12 million
B) $2.01 million
C) $447,531
D) $497,170
E) $948,767
Q2) After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:
A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million
E) $23.0 million
Q3) How can deferring repatriation of earnings benefit a firm?
Q4) What is a cash-and-carry strategy?
Q5) Why might firms prefer hedging with options rather than forward contracts?
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Chapter 23: Leasing
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Q1) What is the difference between a true tax lease and a non-tax lease?
Q2) A lease in which the lessor is the manufacturer (or a primary dealer)of the asset is called a
A) sales-type lease.
B) direct lease.
C) sale and leaseback.
D) leveraged lease.
E) synthetic lease.
Q3) To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.
A)True
B)False
Q4) A lease that is designed to obtain specific accounting and tax treatment is called a A) sales-type lease.
B) direct lease.
C) sale and leaseback.
D) leveraged lease.
E) synthetic lease.
Q5) What is a lease-equivalent loan?
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Chapter 24: Mergers and Acquisitions
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Q1) Which of the following is an example of a merger undertaken in order to achieve economies of scale?
A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.
Q2) The synergies of a merger add so much value to the combined firm that,upon announcement of a merger,the stock prices of both the target and the acquirer increase substantially.
A)True
B)False
Q3) What are synergies?
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Chapter 25: Corporate Governance
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Q1) One way for families to gain control over firms,even when they do not own more than half the shares,is to issue
A) dual class shares.
B) more debt.
C) more equity.
D) restricted shares.
E) commercial paper.
Q2) What is a captured board?
Q3) When the ownership of a corporation is widely held,no one shareholder has the incentive to bear the cost of monitoring the firm's managers.
A)True
B)False
Q4) The most extreme form of direct action that shareholders can take is
A) a resolution.
B) to privately approach the board.
C) a "no" vote.
D) a proxy contest.
E) a "say-on-pay" vote.
Q5) What is the drawback of having more independent directors on the board?
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