Strategic Financial Management
Exam Practice Tests
Course Introduction
Strategic Financial Management explores the principles and practices required to make effective financial decisions that align with an organizations long-term objectives. The course integrates concepts from corporate finance, financial analysis, investment planning, risk management, and value creation, emphasizing how strategic decisions in financing and investment contribute to overall organizational success. Students will learn to assess financial strategies, evaluate capital investment opportunities, design optimal capital structure, and apply methods for managing financial risk. Through case studies and analytical tools, the course prepares students to navigate complex financial scenarios and craft strategies that drive sustainable competitive advantage.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) ____ are important because the financial health of a firm depends on the firm being able to generate sufficient cash to pay its creditors, employees, suppliers, and owners.
A) cash sales
B) cash flows
C) cash profits
D) net profits
Answer: B
Q2) The chief financial officer (CFO) of a corporation normally reports to the ____ of the company.
A) chairman of the board of directors
B) chief operating officer
C) controller
D) chief executive officer
Answer: D
Q3) What is the advantage of an LLC over an LLP business form?
Answer: An LLC (or limited liability company) has three advantages:
1. Has better access to capital to finance growth.
2. It enables broad employee ownership of the firm.
Page 3
3. It enables the firm to engage in strategic acquisitions.
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be trading at a ____.
A) forward premium
B) forward gain
C) forward discount
D) forward loss
Answer: C
Q2) The interest rate in the Eurodollar market is related to
A) the DOW
B) the stock market
C) the LIBOR
D) interest rates in the United States
Answer: C
Q3) ____ markets deal in short-term securities having maturities of one year or less.
A) Credit
B) Money
C) Capital
D) Capital and credit
Answer: B
Page 4
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) Nukin' Gnats Pest Control is trying to determine its cash flow per share. It has revenue of $50,000, $35,000 of expenses, $4,000 of depreciation and $3,000 of interest expense. The firm is in the 40% tax bracket. The firm has 75,000 shares of common stock outstanding. Its cash flow per share is:
A) $.08
B) $.07
C) $.92
D) $.46
Answer: B
Q2) Financial ratios can be used to analyze a firm's performance from A) day to day
B) period to period
C) purchase to purchase
D) sale to sale
Answer: B
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) In considering financial planning, the type of planning that focuses more on the overall direction of the business and the industry is:
A) Deterministic
B) Strategic
C) Operational
D) Probabilistic
Q2) ____ is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined groups based on certain characteristics of the observation.
A) Deterministic analysis
B) Sensitivity analysis
C) Discriminant analysis
D) Optimization
Q3) All the following current liabilities normally vary directly with the sales except:
A) accounts payable
B) notes payable
C) accrued wages
D) accrued taxes
Q4) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%.
A) $153,900
B) $ 68,100
C) $ 65,000
D) $ 70,800
Q2) Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter?
A) $12,107
B) $11,465
C) $9,901
D) $14,727
Q3) Explain the sinking fund problem.
Q4) Why does an annuity due have a greater future value than a regular annuity - all things being equal?
Q5) What is/are the difference(s) between simple interest and compound interest?
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Sample Questions
Q1) What is the collateral used in collateral trust bonds and who is its primary user?
Q2) A Treasury bill with 182 days to maturity is quoted at 5.62 bid, 5.60 asked, and an asked yield of 5.84. How much would you pay for this security?
A) $9,440
B) $9,720
C) $9,708
D) $9,438
Q3) The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the rate of return or current yield on these bonds if they are purchased at the current price of $40.
A) 12.5%
B) 8.0%
C) 5.0%
D) 1.25%
Q4) What is a "payment-in-kind" bond and why is it considered a "weak security"?
Q5) List the restrictions that an indenture places on the borrower of long-term debt.
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.
A) 6%
B) 8%
C) 14%
D) 20%
Q2) Which of the following statements is/are correct about the following stock quotation: +12)5 26 17.50 Dove Assoc. DOA .20 1.0 6 306 20.25 +.50
I. The second and third columns show the price range of the stock during the previous 52 weeks.
II. The highest price that was paid for this stock over a 52-week time period was $20.25.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) What are some of the costs associated with new security offerings?
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Page 9
Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) AKA's stock is currently selling for $11.44. This year the firm had earnings per share of $2.80 and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10 percent and the expected market return is 14.2 percent. What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?
A) an increase of $1.14
B) a decrease of $0.40
C) a decrease of $1.99
D) cannot determine from the given data
Q2) Which of the following statements regarding risk is/are correct?
I. A portfolio of two negatively correlated assets has less risk than either of the individual assets and risk could be further reduced to 0 or below.
II. There is no case where creating a portfolio of assets will result in greater risk than that of the riskiest asset included in the portfolio.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
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Page 10
Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Depreciation is based on the asset cost plus all of the following except
A) shipping costs
B) increase in inventory
C) installation
D) cost of attached equipment acquired at the same time
Q2) What is the marginal cost of capital and why does the MCC schedule increase as more funds are sought in the capital markets?
Q3) Of the following, an example of a component of a firm's cost of capital is:
A) Repurchase of company stock.
B) Investment of corporate funds into a money market account.
C) The purchase of another company's bonds.
D) The return on common stock required by investors.
Q4) ____ have cash flow patterns with more than one sign change.
A) conventional projects
B) non-normal projects
C) normal projects
D) contingent projects
Q5) What are some of the different outlays that may be classified as capital expenditures?
Page 11
Q6) Why should sunk costs not be considered when evaluating a project?
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) The ____ of an investment is the period of time for the ____ to equal the initial cash outlay.
A) profitability index; present value of the cash inflows
B) payback period; cumulative cash inflows
C) payback period; present value of the cash inflows
D) none of the above
Q2) Would you invest in a project that has a net investment of $14,600 and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12 percent?
A) Yes - the NPV is $862.90
B) No - the NPV is -$1,975.70
C) No - the NPV is -$481.70
D) Yes - the NPV is $165.70
Q3) All of the following are reasons why a firm may face capital rationing except:
A) reluctant to issue additional debt
B) the discount rate is too high
C) lacks the managerial resources
D) restrictive covenants that limit borrowing
Q4) Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?
Page 12
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) The risk of an investment project is defined in terms of the potential ____ of its returns.
A) certainty
B) size
C) variability
D) timing
Q2) A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV?
A) 99.38%
B) 0.62%
C) 34.5%
D) 49.38%
Q3) What item has made sensitivity analysis simple and inexpensive?
A) computer accounting software
B) computer spreadsheet software
C) computer webinars
D) computer video and presentation software
Q4) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) Surfin' Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00. It is estimated that Surfin' Bubba will have a growth rate in earnings of 10% into the foreseeable future. If Surfin' Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price.
A) 13.49%
B) 11.57%
C) 12.21%
D) 10.87%
Q2) The optimal capital budget occurs at the point where two curves intersect. Which of the following is/are one of those curves?
I. Weighted marginal cost of capital curve
II. Investment opportunity curve
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) What does the optimal capital budget maximize? How it is determined?
Q4) How is the marginal cost of the various component capital sources determined?
Q5) Explain how the investment opportunity curve is determined.
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) The greater the variability of costs, the greater the business risk of the firm. This is reflected in the:
A) selling price
B) cost of inputs used to produce a firm's output
C) sales volume
D) existence of market power
Q2) The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's ____.
A) financial risk
B) degree of operating leverage
C) market power
D) business risk
Q3) What is the present value of the tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on perpetual debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%?
A) $8.75 million
B) $12.25 million
C) $0.85 million
D) $0.744 million
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Page 15
Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Ipsy Dipsy Preschools, Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans:
1) Equity financing: Sale of 400,000 shares of common at $10 each.
2) Debt financing: Sale of $4 million of 12.5 percent long-term bonds.
Calculate the EBIT-EPS indifference point. Assume the marginal tax rate is 40%.
A) $4.253 million
B) $3.051 million
C) $3.654 million
D) $4.728 million
Q2) The use of increasing amounts of combined leverage ____ the risk of financial distress.
A) decreases
B) increases
C) has no effect on D) creates diversity in
Q3) In what way does management's willingness to assume risk impact the firm?
Q4) What are the effects of leverage on shareholder wealth and the cost of capital?
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Chapter 15: Dividend Policy
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Sample Questions
Q1) Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leigh's dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%.
A) $0.92
B) $0.73
C) $1.09
D) $0.61
Q2) One reason why small business concerns have very low dividend payout ratios is that
A) the firm usually is low on cash
B) the firm needs funds for taxes
C) the firm needs the funds to finance growth
D) the small firm prefers stock offerings
Q3) A stock dividend will not affect which of the following balance sheet items.
A) total assets
B) retained earnings
C) contributed capital in excess of par
D) common stock at par
Q4) What are the procedures for repurchasing stock?
Page 17
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Chapter 16: Working Capital Policy and Short-term Financing
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Q1) Laserscope has an inventory conversion period of 45 days, a receivables conversion period of 42 days, and a payables deferral period of 51 days. What is the length of its cash conversion cycle?
A) 54 days
B) 36 days
C) 48 days
D) can determine with more information
Q2) Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000. The firm has current assets of $1,000,000 and fixed assets of $1,500,000. Cryo-vac has current liabilities of $750,000 of which $300,000 are in notes payable. What additional financing will Cryo-vac need to support the expected sales increase if its profit margin is 8% and the firm expects to pay out $200,000 in dividends? An increase in net fixed assets of $300,000 will be required.
A) $130,000
B) $ 70,000
C) Surplus of $70,000
D) $270,000
Q3) What are the classifications for short-term lenders and how do they differ?
Q4) Explain trade credit.
Page 18
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) A reason that banks would maintain a bank balance exceeding the compensating balance requirements is:
A) It reduces the opportunity cost.
B) It improves the firm's credit rating.
C) It alters the requirements imposed by the bank.
D) It reduces shortage costs.
Q2) Jester, Inc. has annual sales of $434 million. An average of 12 days elapses between the time a customer mails its payment and the funds are available to Jester. What is the increase in the average cash balance if the use of a lock box system is believed to reduce the collection time by 4 days?
A) $ 4.76 million
B) $49.6 million
C) $633,640
D) $ 9.5 million
Q3) The first step in efficient cash management is the development of a ____.
A) liquid asset balance
B) cash budget
C) proforma cash flow statement
D) compensating spreadsheet
Q4) Name the three primary components (or sources) of float:
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Chapter 18: Management of Accounts Receivable and Inventories
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Q1) Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540 and Haulsee's inventory carrying costs average 14% of the inventory value. What is the EOQ for Haulsee?
A) 4,084
B) 1,528
C) 2,890
D) 572
Q2) The most widely known credit reporting organization is:
A) Moody's
B) Standard and Poor's
C) National Association of Credit Management
D) Dun and Bradstreet
Q3) Traditional discussion of guidelines for examining credit worthiness include "the five Cs of credit". Each of the following is one of the "five Cs" except
A) capacity
B) cooperation
C) character
D) conditions
Q4) What are the "five Cs of credit"and how are they used?
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Chapter 19: Lease and Intermediate-term Financing
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Q1) Prime Care has approached the leasing department of First City Bank to arrange lease financing for a $1.2 million CAT scanner. The economic life of the scanner is estimated to be 10 years. The estimated salvage value at the end of 10 years is $0. First City plans to depreciate the scanner on a straight-line basis over 10 years. If First City charges a beginning of the year lease payment of $255,395, what after-tax rate of return will the bank earn on the lease? Assume a marginal tax rate of 40%.
A) 4.7%
B) 16.8%
C) 13%
D) 40%
Q2) All of the following have been cited as advantages of leasing by small businesses except:
A) less cash required up front
B) fewer restrictive covenants from lessor than lenders
C) lower effective interest costs relative to borrowing
D) quicker approvals from lessors than from lenders
Q3) The IRS has general rules pertaining to the tax status of true leases which allow the annual lease payments to be tax deductible. What are those rules?
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Page 21
Chapter 20: Financing With Derivatives
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Q1) If the exercise price of an M-tel warrant is $48 and the stock splits 2 for 1, what will be the post-split exercise price of the warrant? Assume the warrant was selling for $20 before the stock split.
A) $24
B) $20
C) $10
D) $48
Q2) The conversion price of CRX's convertible ($1000 par) subordinated debentures is $40 and the present market price of CRX common stock is $48. Determine the present conversion value of the convertible issue.
A) $1,000
B) $1,200
C) $ 833
D) $1,680
Q3) A ____ is a fixed income security with a call option on common stock.
A) convertible security
B) warrant
C) futures contract
D) derivative security
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Page 22
Chapter 21: Risk Management
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Q1) Marking to market is a procedure for _____________ contracts.
A) futures
B) forwards
C) margin
D) implied
Q2) All of the following are losses generally insured by corporations EXCEPT:
A) Death of key employees
B) Executive bonuses
C) Fraud
D) Product liability
Q3) Which of the following statements about risk management strategies is/are correct?
I. It reduces the variability of a firm's expected cash flows.
II. It reduces the chance of catastrophic financial distress.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q4) What options does the buyer of a futures contract have at the time the futures contract matures?
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Chapter 22: International Financial Management
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Q1) A euro is a
A) monetary unit used in transactions between European central banks
B) monetary unit used in providing capital to the World Bank
C) monetary unit used in transactions between Common Market countries
D) composite currency whose value is based on the weighted value of several European currencies
Q2) If one year U.S. nominal interest rates are 4 percent, one year Canadian nominal interest rates are 7.5 percent, and the current spot exchange rate, S<sub>0</sub>, is $0.587, then the expected spot rate in one year will be:
A) $0.568
B) $0.607
C) $0.564
D) $0.573
Q3) A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.
A) cash
B) equity
C) present value
D) working capital
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Chapter 23: Corporate Restructuring
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Q1) All of the following are anti-takeover measures except:
A) black knight
B) staggered board
C) super major voting rules
D) golden parachute
Q2) In a(n) ____ common stock in a division or subsidiary is distributed to shareholders of the parent company on a pro rata basis.
A) spin-off
B) reverse LBO
C) equity carve-out
D) tender offer
Q3) One reason for a company to spin-off a division is to:
A) consolidate expenses.
B) remove an underperforming unit.
C) create a better distribution unit.
D) achieve synergy.
Q4) How does a joint venture differ from a holding company?
Q5) A new takeover defense is boardmail. How does it work?
Q6) Explain the motivation for a company to divest through a spin-off or equity carve-out.
Page 25
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Chapter 24: Continuous Compounding and Discounting
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Q1) If interest is at 8% and it is compounded continuously, what is the effective interest rate?
A) 7.25%
B) 5.14%
C) 8.33%
D) 9.76%
Q2) Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent.
A) $6,886
B) $3,631
C) $4,616
D) None of the above
Q3) You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%?
A) $621,000
B) $606,531
C) $648,720
D) $904,837
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Chapter 25: Mutually Exclusive Investments Having Unequal
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Q1) Lakeland Ramblers is considering two mutually exclusive projects to boost their tourist revenue. Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years. Project B cost $100,000 and will produce annual net cash flows of $25,000 for 10 years. If Lakeland's cost of capital is 12%, which project should be chosen using the equivalent annual annuity method?
A) Project A, NPV is $17,941 higher
B) Project B, NPV is $11,125 higher
C) Project A, NPV is $28,383 higher
D) Project B, NPV is $21,567 higher
Q2) Using a replacement chain, which project should be chosen? Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows.
A) Project B. NPV of A is negative
B) Project A. NPV of B is negative
C) Project B. NPV is $492 higher
D) Project A. NPV is $6,468 higher
Q3) What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?
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Chapter 26: Breakeven Analysis
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Q1) The breakeven point occurs where total revenues intersect with:
A) market returns
B) the risk-free rate
C) total costs
D) total interest and taxes
Q2) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes. The finished product sells for $60 with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point?
A) 22,187
B) 37,879
C) 56,124
D) 48,961
Q3) Breakeven analysis is normally performed for a planning period of:
A) five years
B) one year or less
C) ten years
D) one month
Q4) What are the possible uses for breakeven analysis?
Q5) List the limitations of breakeven analysis:
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Chapter 27: Bond Refunding Analysis
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Sample Questions
Q1) Why would a corporation consider bond refunding?
Q2) Cutech issued a $150 million of a 20-year, 10.5% debt 5 years ago. Since then, Cutech's financial conditions have improved and management believes that they could refund the old issue with a new 15-year, 7.5% issue. The old debt is now callable at 104 percent of par and issuance costs on the new issue would be 0.6 percent. The unamortized issuance costs on the old issue are $675,000. If Cutech calls the old issue and refunds it, both issues would be outstanding for a two-week period. If the company's marginal tax rate is 40%, should Cutech refund the old issue?
A) Yes, NPV = $43,645,599
B) Yes, NPV = $43,798,975
C) Yes, NPV = $44,364,538
D) No, NPV is negative
Q3) Why is the after-tax cost of debt used in bond refunding analysis?
Q4) If interest rates decline, a firm should consider _______________ to take advantage of the lower interest rates.
A) selling fixed assets
B) stock sales
C) bond refunding
D) investing in marketable securities
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Chapter 28: Taxes
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Sample Questions
Q1) BET had a taxable income of $135,000 in 2010. What is its tax liability?
A) $22,500
B) $52,650
C) $35,900
D) $15,900
Q2) Capital losses are
A) taxed at the same marginal rate as ordinary income
B) taxed at the 20% rate
C) deductible only against capital gains
D) used to reduce interest payments
Q3) Corporate capital gains income is currently taxed at ____ ordinary income.
A) 80 percent of the marginal tax rate on
B) the same marginal rate as
C) 50 percent of the marginal tax rate on
D) none of the above
Q4) Explain the difference between average tax rate and marginal tax rate.
Q5) How are dividends received by a corporation treated for tax purposes?
Q6) How does a tax loss affect a corporation as it applies to past and future income?
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