Managerial Finance
Study Guide Questions
Course Introduction
Managerial Finance explores the principles and practices necessary for effective financial decision-making within organizations. The course covers topics such as financial statement analysis, budgeting, capital structure, working capital management, and investment appraisal. Emphasis is placed on understanding how managers use financial information to evaluate performance, forecast future trends, and make strategic decisions that enhance organizational value. Students develop analytical and problem-solving skills through case studies and practical applications relevant to real-world financial management scenarios.
Recommended Textbook
Corporate Finance 10th Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) The Sarbanes Oxley Act was enacted in:
A) 1952.
B) 1967.
C) 1998.
D) 2002.
E) 2006.
Answer: D
Q2) List and briefly describe the three basic questions addressed by a financial manager.
Answer: The three areas are:
1. Capital budgeting: The financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire.
2. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance its operations.
3. Working capital management: This refers to a firm's short-term assets and short-term liabilities. Managing the firm's working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions.
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Chapter 2: Financial Statements and Cash Flow
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Q1) Sometimes when businesses are critically delinquent on their tax liabilities,the tax authority comes in and literally seizes the business by chasing all of the employees out of the building and changing the locks. What does this tell you about the importance of taxes relative to our discussion of cash flow?
Why might a business owner want to avoid such an occurrence?
Answer: Taxes must be paid in cash,and in this case,they are one of the most important components of cash flow. The reputation of a business can undergo irreparable harm if word gets out that the tax authorities have confiscated the business,even if only for a couple of hours until the business owner can come up with the money to clear up the tax problem. The bottom line is if the owner can't come up with the cash,the tax authority has effectively put them out of business.
Q2) _____ refers to the changes in net capital assets.
A) Operating cash flow
B) Cash flow from investing
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
Answer: B
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Chapter 3: Financial Statements Analysis and Financial Models
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Q1) Sustainable growth can be determined by the:
A) profit margin, total asset turnover and the price to earnings ratio.
B) profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.
C) Total growth less capital gains growth.
D) Either profit margin, total asset turnover and the price to earnings ratio or profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.
E) None of these.
Answer: B
Q2) Fleur International had a 3% profit margin and a 35% dividend payout ratio. The total asset turnover is 1.25 and the equity multiplier is 1.30. What is the sustainable growth rate?
A) 3.27%
B) 3.67%
C) 4.27%
D) 5.60%
E) None of these.
Answer: A
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Chapter 4: Discounted Cash Flow Valuation
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Q1) You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end?
A) $1,598.33
B) $2,203.99
C) $2,228.92
D) $6,991.44
E) None of these.
Q2) You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?
A) You should accept the payments because they are worth $56,451.91 today.
B) You should accept the payments because they are worth $56,523.74 today.
C) You should accept the payments because they are worth $56,737.08 today.
D) You should accept the $50,000 because the payments are only worth $47,757.69 today.
E) You should accept the $50,000 because the payments are only worth $47,808.17 today.
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) The internal rate of return tends to be:
A) easier for managers to comprehend than the net present value.
B) extremely accurate even when cash flow estimates are faulty.
C) ignored by most financial analysts.
D) used primarily to differentiate between mutually exclusive projects.
E) utilized in project analysis only when multiple net present values apply.
Q2) Modified internal rate of return:
A) handles the multiple IRR problem by combining cash flows until only one change in sign change remains.
B) requires the use of a discount rate.
C) does not require the use of a discount rate.
D) Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and requires the use of a discount rate.
E) Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and does not require the use of a discount ratE.
Q3) Discuss how frequently publicly traded firms use different capital budgeting tools.
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Chapter 6: Making Capital Investment Decisions
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Q1) The top-down approach to computing the operating cash flow:
A) ignores all noncash items.
B) applies only if a project produces sales.
C) can only be used if the entire cash flows of a firm are included.
D) is equal to sales - costs - taxes + depreciation.
E) includes the interest expense related to a project.
Q2) This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?
Q3) A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%.
What is the operating cash flow of the project using the tax shield approach?
A) $5,850
B) $8,650
C) $9,350
D) $9,700
E) $10,350
Q4) Explain the half year convention used in MACRS depreciation.
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Chapter 7: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Sensitivity analysis provides information on:
A) whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive.
B) the need for additional information as it tests each variable in isolation.
C) the degree of difficulty in changing multiple variables together.
D) Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the need for additional information as it tests each variable in isolation.
E) Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the degree of difficulty in changing multiple variables together.
Q2) Can different discount rates be used for different stages in a decision tree? If so,what would be the benefit of such action?
Q3) All else equal,the contribution margin must increase as:
A) both the sales price and variable cost per unit increase.
B) the fixed cost per unit declines.
C) the variable cost per unit declines.
D) sales price per unit declines.
E) the sales price minus the fixed cost per unit increases.
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Chapter 8: Interest Rates and Bond Valuation
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Q1) The total interest paid on a zero-coupon bond is equal to:
A) zero.
B) the face value minus the issue price.
C) the face value minus the market price on the maturity date.
D) $1,000 minus the face value.
E) $1,000 minus the par valuE.
Q2) The Lo Sun Corporation offers a 8% bond with a current market price of $875.05. The yield to maturity is 9.18%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
A) 40 years
B) 52 years
C) 60 years
D) 65 years
E) 80 years
Q3) The annual coupon of a bond divided by its face value is called the bond's:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon ratE.
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Chapter 9: Stock Valuation
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Q1) Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.
A) remain constant
B) decrease by 5%
C) increase by 5%
D) increase by 10%
E) increase by 15%
Q2) What are the components of the required rate of return on a share of stock? Briefly explain each component.
Q3) A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.
A) dual class
B) cumulative
C) deferred
D) preferred
E) common
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Capital market history shows us that the average return relationship from lowest to highest between securities is:
A) inflation, corporate bonds, Treasuries, small company stocks, large company stocks.
B) Treasury bills, inflation, small company stocks, large company stocks.
C) Treasury bills, corporate bonds, government bonds, large common stocks, small company stocks.
D) Treasury bills, government bonds, corporate bonds, large common stocks, small company stocks.
E) There is no ordering.
Q2) The average compound return earned per year over a multi-year period is called the _____ average return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
Q3) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) You want your portfolio beta to be 1.20. Currently,your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset?
A) $0
B) $140
C) $200
D) $320
E) $400
Q2) According to the CAPM,the expected return on a risky asset depends on three components. Describe each component,and explain its role in determining expected return.
Q3) Diversification will not lower the ____ risk:
A) total risk.
B) systematic risk.
C) unsystematic risk.
D) variance risk.
E) standard error.
Q4) Explain in words what beta is and why it is important.
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Chapter 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
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Q1) Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production. In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively. However,actual growth in these factors turns out to be 1%,-2%,and 2%. The factor betas are given by <sub>EX</sub> = 1.8, <sub>I</sub> = 0.7,and <sub>IP</sub> = 1.0. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.
A) -4.05%
B) -2.05%
C) 4.55%
D) 0.40%
E) 1.85%
Q2) The Fama-French three factor model predicts the expected return on a portfolio increases:
A) linearly with its factor loading of the size factor.
B) linearly with its factor loading of the volume.
C) exponentially with its factor loading of the size factor.
D) exponentially with its factor loading of the volume factor.
E) None of these.
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Chapter 13: Risk, Cost of Capital, and Valuation
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Q1) The net cash flows of Advantage Leasing for the next 3 years are $42,000,$49,000 and $64,000 respectively,after which the growth rate will be a constant 2% with a WACC of 8%. What is the present value of the terminal value?
A) 51,822
B) 55,967
C) 59,259
D) 60,444
E) None of these.
Q2) The weighted average of the firm's costs of equity,preferred stock,and after tax debt is the:
A) reward to risk ratio for the firm.
B) expected capital gains yield for the stock.
C) expected capital gains yield for the firm.
D) portfolio beta for the firm.
E) weighted average cost of capital (WACC).
Q3) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Which of the following statements is true?
A) In efficient markets, a stock's price should change with the arrival of new information.
B) Average stock returns are higher in January than other months.
C) Studies by Fama and French and others find that returns of high book to market stocks are much higher than low book to market value stocks to be consistent with the efficient market hypothesis.
D) All of these.
E) None of these.
Q2) The market price of a stock moves or fluctuates daily. This fluctuation is:
A) inconsistent with the semistrong efficient market hypothesis because prices should be stable.
B) inconsistent with the weak form efficient market hypothesis because all past information should be priced in.
C) consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it.
D) consistent with the strong form because prices are controlled by insiders.
E) None of these.
Q3) Define the three forms of market efficiency.
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Chapter 15: Long-Term Financing
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Q1) Technically speaking,a long-term corporate debt offering that features a specific attachment to corporate property is generally called:
A) a debenture.
B) a bond.
C) a long-term liability.
D) a preferred liability.
E) None of these.
Q2) Shares of stock that have been repurchased by the corporation are called:
A) treasury stock.
B) undistributed capital stock.
C) retained equity.
D) capital surplus shares.
E) None of these.
Q3) If a debt issue is callable,the call price is generally ____ par.
A) greater than
B) less than
C) equal to
D) unrelated to
E) It varies widely based on the risk of the firm.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) Discuss Modigliani and Miller's Propositions I and II in a world without taxes. List the basic assumptions,results,and intuition of the model.
Q2) Rosita's has a cost of equity of 13.8% and a pre-tax cost of debt of 8.5%. The debt-equity ratio is .60 and the tax rate is .34. What is Rosita's unlevered cost of capital?
A) 8.83%
B) 12.30%
C) 13.97%
D) 14.08%
E) 14.60%
Q3) In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don't financial managers use as little debt as possible to keep the cost of equity down?
After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?
Q4) Discuss Modigliani and Miller's Propositions I and II in a world with taxes. List the basic assumptions,results,and intuition of the model.
Q5) Explain homemade leverage and why it matters.
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Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:
A) the firm always choosing projects with the positive NPVs.
B) the firm turning down positive NPV projects that it would clearly accept in an all equity firm.
C) stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
D) Both the firm always choosing projects with the positive NPVs; and stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
E) Both the firm turning down positive NPV projects that it would clearly accept in an all equity firm; and stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
Q2) What are the advantages of a prepackaged bankruptcy for a firm? What are the disadvantages?
Q3) What is the pecking order theory and what are the implications that arise from this theory?
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) Non-market or subsidized financing ________ the APV ___________.
A) has no impact on; as the lower interest rate is offset by the lower discount rate
B) decreases; by decreasing the NPV of the loan
C) increases; by increasing the NPV of the loan
D) has no impact on; as the tax deduction is not allowed with any government supported financing
E) None of these.
Q2) A firm is valued at $8 million and has debt of $2 million outstanding. The firm has an equity beta of 1.5 and a debt beta of .60. The beta of the overall firm is:
A) 0.600.
B) 1.155.
C) 1.275.
D) 1.500.
E) None of these.
Q3) Discuss the adjusted present value,the flow to equity and the weighted average cost of capital methods of capital budgeting with leverage and the guidelines for using each method.
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Chapter 19: Dividends and Other Payouts
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Q1) Robinson's has 15,000 shares of stock outstanding with a par value of $1.00 per share and a market price of $36 a share. The balance sheet shows $15,000 in the common stock account,$315,000 in the capital in excess of par account,and $189,000 in the retained earnings account. The firm just announced a 3-for-2 stock split. What will the value of the common stock account be after the split?
A) $10,000
B) $12,500
C) $15,000
D) $18,500
E) $22,500
Q2) A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how many shares they are willing to sell at various prices. This process is called a:
A) dividend creation model.
B) secondary market transaction.
C) free market sale.
D) Dutch auction.
E) None of these.
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Chapter 20: Raising Capital
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Q1) Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:
A) underwriters buy at an agreed upon price and bear some risk of selling the issue.
B) cash proceeds are available sooner in underwriting and the issue is available to a wider market.
C) investment bankers can provide market advice and certify the issue for potential investors.
D) All of these.
E) None of these.
Q2) Arguments against the use of the shelf-registration are:
A) only technology and manufacturing-based firms can use it.
B) less current information available to investors might raise the cost of debt.
C) possible market overhang from future issues depressing price.
D) Both only technology and manufacturing-based firms can use it; and possible market overhang from future issues depressing price.
E) Both less current information available to investors might raise the cost of debt; and possible market overhang from future issues depressing pricE.
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Chapter 21: Leasing
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Q1) An independent leasing company supplies ___________ leases versus the manufacturer who supplies ________________ leases.
A) leveraged; direct
B) sales and leaseback; sales-type
C) capital; sales-type
D) direct; sales-type
E) None of these.
Q2) A lease is likely to be most beneficial to both parties when:
A) the lessor's tax rate is lower than the lessee's.
B) the lessor's tax rate is higher than the lessee's.
C) the lessor's tax rate is equal to the lessee's.
D) a lease cannot be beneficial to both parties.
E) a lease always has zero NPV, so both parties always break even.
Q3) ______ would be evidence the lease is being used to avoid taxes and not a legitimate business purpose.
A) Early balloon payments
B) Late balloon payments
C) Capitalizing a lease
D) Transfer of lease payments to a second owner
E) None of these.
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Chapter 22: Options and Corporate Finance
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Q1) Which one of the following will cause the value of a call to decrease?
A) lowering the exercise price
B) increasing the time to expiration
C) increasing the risk-free rate
D) lowering the risk level of the underlying security
E) increasing the stock price
Q2) The effect on an option's value of a small change in the value of the underlying asset is called the option:
A) theta.
B) vega.
C) rho.
D) delta.
E) gamma.
Q3) Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares. Jeff must have owned a(an):
A) warrant.
B) American call.
C) American put.
D) European call.
E) European put.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) An example of a special option is:
A) an executive stock option.
B) the embedded option in a start-up company.
C) the option in simple business contracts.
D) the option to shut down and reopen a project.
E) All of
Q2) The CEO of NuValue was granted 1,000,000 options. The stock price at the time of the granting of the options was $45 and the options are at the money. The risk free rate was 5% and the options expire in 5 years. The variance on the stock is .04. What is the value of the options contract?
If he had negotiated a larger salary and only 10,000 options,what would be the value of the options contract?
Q3) The opportunity to defer investing to a later date may have value because:
A) the cost of capital may decline in the near future.
B) certainty may be reduced in the future.
C) investment costs fluctuate in time.
D) All of these.
E) None of these.
Q4) Why would the company pay the executive in options as opposed to salary?
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Chapter 24: Warrants and Convertibles
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Q1) A convertible bond has an 8% annual coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $20.875 per share. Similar nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:
A) $835.00.
B) $919.39.
C) $1,000.00.
D) $1,570.11.
E) None of these.
Q2) A convertible preferred stock is similar to a convertible bond except:
A) the conversion ratio is fixed (given).
B) the conversion price is fixed (given).
C) the time to maturity is infinite.
D) All of these.
E) None of these.
Q3) A convertible bond is selling for $993. It has 15 years to maturity,a $1,000 face value,and an 8% coupon paid semi-annually. Similar non-convertible bonds are priced to yield 8.5%. The conversion ratio is 20. The stock currently sells for $47.50 per share. Calculate the convertible bond's option value.
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Chapter 25: Derivatives and Hedging Risk
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Q1) A financial institution can hedge its interest rate risk by:
A) matching the duration of its assets to the duration of its liabilities.
B) setting the duration of its assets equal to half that of the duration of its liabilities.
C) matching the duration of its assets, weighted by the market value of its assets with the duration of its liabilities, weighted by the market value of its liabilities.
D) setting the duration of its assets, weighted by the market value of its assets to one half that of the duration of the liabilities, weighted by the market value of the liabilities.
Q2) To protect against interest rate risk,the mortgage banker should:
A) buy futures, as this position will hedge losses if rates rise.
B) sell futures, as this position will hedge losses if rates rise.
C) sell futures, as this position will add to his gains if rates rise.
D) buy futures, as this position will add to his gains if rates rise.
E) None of these.
Q3) Duration is defined as the weighted average time to maturity of a financial instrument. Explain how this knowledge can help protect against interest rate risk.
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Chapter 26: Short-Term Finance and Planning
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Q1) ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer. The firm is now changing its policy and only producing a product when it receives an actual order from a customer. All else equal,this change will:
A) increase the operating cycle.
B) lengthen the accounts receivable period.
C) shorten the accounts payable period.
D) decrease the cash cycle.
E) decrease the inventory turnover ratE.
Q2) Your firm collects 30% of sales in the month of sale,55% of sales in the month following the month of sale and 13% of sales in the second month following the month of sale. Given this,you will collect _____ sales during the month of June.
A) 30% of May
B) 55% of June
C) 13% of May
D) 55% of May
E) 13% of March
Q3) List and describe the three basic types of secured inventory loans. What are the advantages and disadvantages of each type of loan?
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Page 28
Chapter 27: Cash Management
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Q1) If a firm has achieved its target cash balance the net present value is:
A) positive because the cash balance is positive.
B) zero because increasing the cash balance increases the interest cost.
C) negative because the cash balance has a financing cost.
D) positive because decreasing the cash decreases the cost of illiquidity.
E) None of these.
Q2) The major difference between a check and a draft is that:
A) the draft is not drawn on the bank but on the issuer.
B) the bank must present the draft to the firm for acceptance.
C) after acceptance of the draft the firm must deposit the funds to make payment.
D) All of these.
E) None of these.
Q3) A sensible cash management policy would be to:
A) have enough cash on hand to meet ordinary course of business and some excess cash to invest in marketable securities as a precautionary measure.
B) have nearly enough cash on hand to meet ordinary course of business.
C) have enough cash on hand to meet any potential demand for cash.
D) have a zero cash balance and charge all expenditures.
E) None of these.
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Page 29
Chapter 28: Credit and Inventory Management
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Q1) Ali Storage Company projects 800 customers next year. Of these,600 have been profitable and have never defaulted on past obligations,while 200 have not been profitable. All of the unprofitable accounts are expected to default if given credit. Ali can pay $0.40 to an agency that will tell them whether a customer has been profitable. If Ali's price per unit is $10,and its cost per unit is $6,should they allow the credit check to be performed?
Assume a discount rate of 1%.
Q2) If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:
A) 20 days.
B) 22 days.
C) 26 days.
D) 30 days.
E) None of these.
Q3) The average collection period measures:
A) the average time necessary to collect a credit sale.
B) how long the companies money is invested in their customers.
C) the days sales outstanding.
D) All of these.
E) None of these.
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Chapter 29: Mergers, Acquisitions, and Divestitures
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Q1) The distribution of shares in a subsidiary to existing parent company stockholders is called a(n):
A) lockup transaction.
B) bear hug.
C) equity carve-out.
D) spin-off.
E) split-up.
Q2) When the management and/or a small group of investors take over a firm and the shares of the firm are delisted and no longer publicly available,this action is known as a: A) consolidation.
B) vertical acquisition.
C) proxy contest.
D) going-private transaction.
E) None of these.
Q3) Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
Q4) Discuss why AT&T purchased T-Mobile in 2011.
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Chapter 30: Financial Distress
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Q1) The absolute priority rule:
A) is set to ensure senior claims are paid first.
B) is the priority rule in liquidations.
C) distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured.
D) All of these.
E) None of these.
Q2) Very small firms are more likely to:
A) file for strategic bankruptcy.
B) file for bankruptcy protection earlier than large firms.
C) reorganize than liquidate compared to large firms.
D) liquidate than reorganize compared to large firms.
E) None of these.
Q3) APR,as it relates to financial distress,means the rules of:
A) absolute profitability.
B) arbitration priority.
C) absolute priority.
D) arbitration profitability.
E) automatic profitability.
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Page 32
Chapter 31: International Corporate Finance
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Q1) Suppose that the spot rate on the Canadian dollar is C$1.40. The risk-free nominal rate in the U.S. is 8 percent while it is only 4 percent in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?
A) C$1.278
B) C$1.344
C) C$1.355
D) C$1.456
E) C$1.512
Q2) Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions.
II) helps keep the currency market in equilibrium.
III) opportunities can exist in either the spot or the forward market.
IV) only involves currencies other than the U.S. dollar.
A) I and IV only
B) II and III only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV
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