Course Introduction
Managerial Finance Study Guide
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Managerial Finance explores the principles and practices involved in financial decision-making within organizations. The course covers topics such as financial statement analysis, budgeting, capital structure, cost of capital, investment analysis, and working capital management. Emphasis is placed on how managers use financial information to plan, control, and evaluate business operations and strategic initiatives. Students learn to apply financial tools and concepts to solve real-world business problems and support organizational goals, preparing them for effective roles in financial planning and management.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following is/are an advantage of incorporation?
A)Access to capital markets
B)Limited liability
C)Unlimited life
D)All of the above
Answer: D
Q2) A sole proprietorship is owned by:
A)one person.
B)two of more persons.
C)shareholders.
D)bankers.
Answer: A
Q3) 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
Answer: D
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) The firm's revenues and expenses over a period of time are reported on the firm's:
A)income statement or statement of financial performance.
B)income statement or statement of financial position.
C)balance sheet or statement of financial performance.
D)balance sheet or statement of financial position.
Answer: A
Q2) Gross profit is calculated as:
A)Total sales - cost of sales - selling,general and administrative expenses - depreciation and amortization.
B)Total sales - cost of sales - selling,general and administrative expenses.
C)Total sales - cost of sales.
D)None of the above
Answer: C
Q3) Perrigo's price-earnings ratio (P/E)is closest to:
A)15.96
B)21.85
C)29.77
D)35.64
Answer: B
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
Q2) Without issuing the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?
A)$1.7 million; Yes
B)$1.7 million; No
C)$2.7 million; Yes
D)$2.7 million; No
Answer: C
Q3) Suppose you have $1000 today and the risk-free rate of interest (r<sub>f</sub>)is 3.5%.The equivalent value in one year is closest to:
A)$965.00 today.
B)$966.18 today.
C)$1000.00 today.
D)$1035.00 today.
Answer: D
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Page 5
Chapter 4: The Time Value of Money
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Q1) The ranking of the four alternatives from most valuable to least valuable if the interest rate is 6% per year would be:
A)1,2,3,4
B)1,3,2,4
C)4,3,1,2
D)3,4,2,1
Q2) Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:
A)$2,673,000
B)$2,000,000
C)$1,673,000
D)$1,000,000
Q3) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q4) The future value at retirement (age 65)of your savings is:
Q5) Draw a timeline detailing the cash flows from investment "B."
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Chapter 5: Interest Rates
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Q1) Which of the following statements is FALSE?
A)The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
B)Interest rates we observe in the market will vary based on quoting conventions,the term of investment,and risk.
C)The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.
D)For a risk-free project,the opportunity cost of capital will typically be greater than the interest rate of U.S.Treasury securities with a similar term.
Q2) If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%,then the inflation rate is closest to:
A)5.70%
B)6.20%
C)6.55%
D)12.25%
Q3) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q4) Should you purchase the delivery truck or lease it? Why?
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Page 7
Chapter 6: Valuing Bonds
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Q1) If the YTM of these bonds decreases to 7%,which bond's price would be most sensitive to this change in YTM?
A)#1
B)#2
C)#3
D)#4
E)#3 and #4
Q2) The likely effect of a country printing additional currency to pay its debts is:
A)high inflation
B)devaluation of the currency
C)appreciation of the currency
D)A and B
Q3) Assuming that Luther's bonds receive a AAA rating,the number of bonds that Luther must issue to raise the needed $25 million is closest to:
A)24,655
B)25,000
C)24,477
D)26,681
Q4) Plot the zero-coupon yield curve (for the first five years).
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Chapter 7: Investment Decision Rules
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Q1) Which of the following statements is FALSE?
A)The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.
B)The payback rule is reliable because it considers the time value of money and depends on the cost of capital.
C)For most investment opportunities,expenses occur initially and cash is received later.
D)Fifty percent of firms surveyed reported using the payback rule for making decisions.
Q2) Assume the appropriate discount rate for this project is 15%.The IRR for this project is closest to:
A)21%
B)22%
C)15%
D)60%
Q3) Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Which of the following statements is FALSE?
A)The simplest method used to calculate depreciation is the straight-line method.
B)A sunk cost is any unrecoverable cost for which the firm is already liable.
C)Unlevered Net Income = EBIT × <sub>c</sub>.
D)The decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward.
Q2) Which of the following statements is FALSE?
A)Depreciation is a method used for accounting and tax purposes to allocate the original purchase cost of the asset over its life.
B)Sometimes the firm explicitly forecast free cash flow over a shorter horizon than the full horizon of the project or investment.
C)Earnings include the cost of capital investments,but do not include non-cash charges,such as depreciation.
D)Firms often report a different depreciation expense for accounting and for tax purposes.
Q3) What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?
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Chapter 9: Valuing Stocks
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Q1) Which of the following is NOT a situation where a trader is able to identify positive NPV trading opportunities in the securities markets?
A)An investor who has access to information known only to a few investors.
B)An investor who has lower trading costs than other market participants.
C)An investor who gets up really early in the morning so he can be the first to read and act upon the information contained in that day's Wall Street Journal.
D)An investor who has expertise in a highly complicated area for which a company has just released information.
Q2) The enterprise value of CCM corporation is closest to:
A)$396 million
B)$290 million
C)$382 million
D)$350 million
Q3) Taggart's market capitalization is closest to:
A)$25 billion
B)$31 billion
C)$40 billion
D)$50 billion
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11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:
A)9.1%
B)10.3%
C)11.0%
D)12.0%
Q2) Which of the following is NOT a systematic risk?
A)The risk that oil prices rise,increasing production costs
B)The risk that the Federal Reserve raises interest rates
C)The risk that the economy slows,reducing demand for your firm's products
D)The risk that your new product will not receive regulatory approval
Q3) The beta for security "Y" is closest to:
A)-1.00
B)-0.25
C)0.00
D)0.25
Q4) Suppose that you want to use the 10 year historical average return on Stock B to forecast the expected future return on Stock B.Calculate the 95% confidence interval for your estimate of the expect return.
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) The expected return on your investment is closest to:
A)18%
B)20%
C)12%
D)24%
Q2) The volatility on the market portfolio (which is a 50-50 combination of the value and growth portfolios)is closest to:
A)13.5%
B)15.2%
C)17.1%
D)19.0%
Q3) The beta for the market portfolio is closest to:
A)1
B)0
C)Unable to answer this question without knowing the markets expected return
D)Unable to answer this question without knowing the markets volatility
Q4) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q6) Calculate the correlation between Stock Y's and Stock Z's returns . Page 13
Q5) Calculate the covariance between Stock Y's and Stock Z's returns .
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Page 14
Chapter 12: Estimating the Cost of Capital
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Q1) If a firm's excess cash holdings are greater than its debt,using net debt as the measure of leverage will result in:
A)its unlevered beta and cost of capital equalling zero.
B)its unlevered beta and cost of capital being greater than its equity beta and cost of capital.
C)the risk of the firm's equity being increased by its cash holdings in excess of its operating needs.
D)the risk of the firm's debt being increased by its cash holdings in excess of its operating needs.
Q2) The overall value of Wyatt Oil (in $ millions)is closest to:
A)$25,000
B)$18,846
C)$31,250
D)$15,000
Q3) The equity cost of capital for "Miney" is closest to:
A)6.30%
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Page 15
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) The tendency of uninformed individuals to overestimate the precision of their knowledge is known as:
A)overconfidence bias.
B)herd behavior.
C)familiarity bias.
D)disposition bias.
Q2) If investors believe that others have superior information which they can take advantage of by copying their trades,this can lead to:
A)an informational cascade effect.
B)a disposition effect.
C)a sensation seeking effect.
D)an overconfidence bias.
Q3) According to study by Berk and van Binsbergen,which risk model determines mutual fund flows?
A)The CAPM risk-adjusted return
B)The absolute return
C)The excess return over T-Bills
D)Alpha-Beta factors
Q4) Explain why the market portfolio proxy may not be efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Which of the following statements is FALSE?
A)As long as the firm's choice of securities does not change the cash flows generated by its assets,the capital structure decision will not change the total value of the firm or the amount of capital it can raise.
B)If securities are fairly priced,then buying or selling securities has an NPV of zero and,therefore,should not change the value of a firm.
C)The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.
D)An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio.
Q2) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:
A)$6000
B)$10,000
C)$0
D)$33,000
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Page 17
Chapter 15: Debt and Taxes
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Q1) Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered for the year 2004.
Q2) Wyatt Oil has 25 million shares outstanding and has a marginal corporate tax rate of 40%.Wyatt Oil announces that it will payout $40 million in cash to investors through a special dividend.Shareholders had previously assumed that Wyatt Oil would retain this excess cash permanently.The amount that Wyatt Oil's share price can be expected to change upon this announcement is closest to:
A)$0.56
B)$0.64
C)$0.96
D)$1.56
Q3) KAHR Incorporated will have EBIT this coming year of $45 million.It will also spend $18 million on total capital expenditures,increases its net working capital by $7,and have $9 million in depreciation expenses.KAHR is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.If the interest rate on new KAHR debt is 8%,how much should KAHR borrow today if they want to maximize there interest tax shield?
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Page 18
Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) Which of the following statements is FALSE?
A)An important consequence of leverage is the risk of bankruptcy.
B)Whether default occurs depends on the cash flows,not on the relative values of the firm's assets and liabilities.
C)Economic distress is a significant decline in the value of a firm's assets,whether or not it experiences financial distress due to leverage.
D)Modigliani and Miller's results continue to hold in a perfect market even when debt is risky and the firm may default.
Q2) Which of the following statements is FALSE?
A)The optimal level of debt D*,balances the costs and benefits of leverage.
B)As the debt level increases,the firm benefits from the interest tax shield (which has present value *D).
C)If the debt level is too large firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT),financial distress costs,and the agency costs of leverage.
D)As the debt level increases,the firm faces worse incentives for management,which increase wasteful investment and perks.
Q3) List five general categories of indirect costs associated with bankruptcy.
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Page 19
Chapter 17: Payout Policy
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Q1) The effective dividend tax rate for a buy and hold individual investor in 1999 is closest to:
A)25%
B)0%
C)20%
D)40%
Q2) Assuming Luther issues a 5:2 stock split,then the number of shares Luther will have outstanding following the split is closest to:
A)25.0 million
B)12.5 million
C)2.0 million
D)16.0 million
Q3) Suppose that Rearden Metal made a surprise announcement that it would do a share repurchase rather than pay a special dividend,the net tax savings per share for an investor that would result from this decision is closest to:
A)$1.25
B)$3.75
C)$4.00
D)$5.00
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Page 20
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following questions is FALSE?
A)Sometimes management may believe that the securities they are issuing are priced at less than (or more than)their true value.If so,the NPV of the transaction,which is the difference between the actual money raised and the true value of the securities sold,should not be included in the value of the project.
B)An alternative method of incorporating financial distress and agency costs is to first value the project ignoring these costs,and then value the incremental cash flows associated with financial distress and agency problems separately.
C)When the debt level-and,therefore,the probability of financial distress-is high,the expected free cash flow will be reduced by the expected costs associated with financial distress and agency problems.
D)If the financing of the project involves an equity issue,and if management believes that the equity will sell at a price that is less than its true value,this mispricing is a cost of the project for the existing shareholders.
Q2) Calculate the NPV for Iota's new project.
Q3) Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
Q2) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A)17.6
B)16.4
C)14.5
D)19.0
Q3) The amount of net working capital for Ideko in 2007 is closest to:
A)$30,510
B)$26,420
C)$22,170
D)$35,195
Q4) The after tax interest expense in 2008 is closest to:
A)2380
B)4420
C)6800
D)7820
Q5) What is the purpose of the sensitivity analysis?
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