Strategic Financial Management
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Course Introduction
Strategic Financial Management focuses on the integration of financial theory with strategic and operational decision-making within organizations. The course covers advanced concepts such as capital budgeting, risk management, capital structure, valuation, corporate governance, and financial planning, emphasizing the role of finance in shaping long-term business strategies. Students learn to analyze financial statements, evaluate investment opportunities, and develop frameworks for making complex financial decisions that align with organizational objectives and market dynamics. Through case studies and real-world examples, this course equips students with the analytical tools and strategic insights necessary for effective financial leadership in dynamic and competitive environments.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) in a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
C) a slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
D) the limited partners in a limited partnership have voting control, while the general partner has operating control over the business. also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
E) a major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
Answer: B
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Chapter 2: Risk and Return-Part I
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Q1) Which of the following statements is CORRECT
A) other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase.
B) if a company's beta were cut in half, then its required rate of return would also be halved.
C) if the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
D) if the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
E) if a company's beta doubles, then its required rate of return will also double.
Answer: D
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Chapter 3: Risk and Return-Part II
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Q1) It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.
A)True
B)False
Answer: True
Q2) Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a share and adding it to her portfolio. Safety has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp
A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48
Answer: B
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Page 5
Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A) the total yield on a bond is derived from dividends plus changes in the price of the bond.
B) bonds are riskier than common stocks and therefore have higher required returns.
C) bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D) the market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
E) if the federal reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
Q2) For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
A)True B)False
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Chapter 5: Financial Options
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Q1) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
Q2) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
Q3) If a stock's price is above the strike price of a call option written on the stock, then the exercise value is equal to the stock price minus the strike price. If the stock price is below the strike price, the exercise value of the call option is zero.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) Which of the following statements is CORRECT?
A) one way to increase eva is to achieve the same level of operating income but with more investor-supplied capital.
B) if a firm reports positive net income, its eva must also be positive.
C) one drawback of eva as a performance measure is that it mistakenly assumes that equity capital is free.
D) one way to increase eva is to generate the same level of operating income but with less investor-supplied capital.
E) actions that increase reported net income will always increase net cash flow.
Q2) The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Q3) Total net operating capital is equal to net fixed assets.
A)True
B)False
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Chapter 7: Analysis of Financial Statements
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Q1) Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?
A) increase the number of years over which fixed assets are depreciated for tax purposes.
B) pay down the accounts payables.
C) reduce the days' sales outstanding (dso) without affecting sales or operating costs.
D) pay workers more frequently to decrease the accrued wages balance.
E) reduce the inventory turnover ratio without affecting sales or operating costs.
Q2) Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT?
A) company a trades at a higher p/e ratio.
B) company a probably has fewer growth opportunities.
C) company a is probably judged by investors to be riskier.
D) company a must have a higher market-to-book ratio.
E) company a must pay a lower dividend.
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Chapter 8: Basic Stock Valuation
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Q1) Which of the following statements is CORRECT?
A) the preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.
B) the preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.
C) the stock valuation model, p0 = d1/(rs g), cannot be used for firms that have negative growth rates.
D) the stock valuation model, p0 = d1/(rs g), can be used only for firms whose growth rates exceed their required returns.
E) if a company has two classes of common stock, class a and class b, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.
Q2) The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
A)True
B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) Based on the projections, Decker will have
A) a financing surplus of $36
B) a financing deficit of $36
C) a financing surplus of $255
D) a financing deficit of $255
E) zero financing surplus or deficit
Q2) Refer to the Judd Enterprises financial statements. If Judd does not plan on issuing new stock or additional long-term debt, then what is the additional net financing needed for the projected year?
A) $30
B) $33
C) $37
D) $339
E) $396
Q3) One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) one tool of corporate governance is how the company's charter affects the likelihood of a takeover.
B) one tool of corporate governance is stock repurchases.
C) one tool of corporate governance is a company's tax avoidance strategy.
D) one tool of corporate governance is choosing a good investment banker.
E) creditors have a claim on a firm's earning stream through the dividend payments they receive.
Q2) Which one of the following corporate board characteristics usually improves corporate governance?
A) ceo is not the chairman of the board.
B) the board has many outsiders who have lots of other important commitments.
C) the board is as large as is possible.
D) board members are paid at a rate higher than their peers and their payment is mostly cash.
E) the board has a majority of insiders from company management on it who bring first-hand knowledge of how the company operates.
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Chapter 11: Determining the Cost of Capital
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Q1) Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
A) 4.35%
B) 4.58%
C) 4.83%
D) 5.08%
E) 5.33%
Q2) Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
A) the flotation costs associated with issuing new common stock increase.
B) the company's beta increases.
C) expected inflation increases.
D) the flotation costs associated with issuing preferred stock increase.
E) the market risk premium declines.
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Page 13
Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Which of the following statements is CORRECT?
A) the discounted payback method recognizes all cash flows over a project's life, and it also adjusts these cash flows to account for the time value of money.
B) the regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
C) the regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D) the regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
E) the regular payback method recognizes all cash flows over a project's life.
Q2) Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.
A)True
B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant.
A)True
B)False
Q2) Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision estimates of its effect would really just be guesses. In this case, the externality should be ignored-i.e., not considered at all because if it were considered it would make the analysis appear more precise than it really is.
A)True
B)False
Q3) In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.
A)True
B)False
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15
Chapter 14: Real Options
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Q1) Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
A)True
B)False
Q2) Refer to the data for Drilling Experts, Incorporated. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars?
A) $336.15
B) $373.50
C) $415.00
D) $461.11
E) $507.22
Q3) Refer to data for Steppingstone Incorporated. Based on the above information, what is the Z 90's expected net present value?
A)$6,678
B)$3,251
C) $15,303
D) $20,004
E) $45,965
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Page 16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
A) $100,000
B) $200,000
C) $300,000
D) $400,000
E) $500,000
Q2) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
A)True
B)False
Q3) If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget. Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.
A)True
B)False
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Chapter 16: Capital Structure Decisions
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Q1) Which of the following statements is CORRECT?
A) if a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant, this would decrease its operating leverage.
B) the debt ratio that maximizes eps generally exceeds the debt ratio that maximizes share price.
C) if a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (assume that the repurchase has no impact on the company's operating income.)
D) if changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation's debt ratio.
E) increasing financial leverage is one way to increase a firm's basic earning power (bep).
Q2) Whenever a firm borrows money, it is using financial leverage.
A)True
B)False
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to the data for NorthWest Water (NWW). What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
A) $5,049,939
B) $5,315,725
C) $5,595,500
D) $5,890,000
E) $6,200,000
Q2) MM showed that in a world without taxes, a firm's value is not affected by its capital structure.
A)True
B)False
Q3) Refer to data for Glassmaker Corporation. According to the compressed adjusted present value model, what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?
A) 10.01%
B) 10.06%
C) 11.29%
D) 11.44%
E) 13.49%
19
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Q1) The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering. The banker is, in effect, "buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.
A)True
B)False
Q2) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
Q3) The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.
A)True
B)False
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Chapter 19: Lease Financing
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Q1) Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.
A)True
B)False
Q2) In the lease versus buy decision, leasing is often preferable
A) because, generally, no down payment is required, and there are no indirect interest costs.
B) because lease obligations do not affect the firm's risk as seen by investors.
C) because the lessee owns the property at the end of the least term.
D) because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E) because it has no effect on the firm's ability to borrow to make other investments.
Q3) Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
A)True
B)False
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21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?
A) 6.66%
B) 6.99%
C) 7.34%
D) 7.71%
E) 8.09%
Q2) Refer to the data for the Neuman Corporation's convertible bonds. What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?
A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14
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Chapter 21: Supply Chains and Working Capital Management
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Q1) The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.
A)True
B)False
Q2) Krackle Korn Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?
A) $335,616
B) $352,397
C) $370,017
D) $388,518
E) $407,944
Q3) Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.
A)True
B)False
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q2) Refer to Exhibit Van Doren. What would be the incremental cost of carrying receivables if the change were made?
A)$108,750 (carrying costs would decline)
B) $116,250
C) $157,900
D) $225,000 (carrying costs would decline)
E) $260,000
Q3) Refer to Exhibit Van Doren. What are the incremental pre-tax profits from this proposal?
A) $283,750
B) $250,500
C) $303,250
D) $493,750
E) $288,250
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24
Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Palmer Pens. What is Palmer's minimum costs of ordering and holding inventory?
A) $6,254
B) $10,733
C) $11,560
D) $13,563
E) $19,825
Q2) Refer to Exhibit Palmer Pens. What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 13,563
E) 21,456
Q3) Which of the following would cause average inventory holdings to decrease, other things held constant?
A) the purchase price of inventory items decreases by 50 percent.
B) the carrying price of an item decreases (as a percent of purchase price).
C) the sales forecast is revised downward by 10 percent.
D) interest rates fall.
E) fixed order costs double.
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Chapter 24: Enterprise Risk Management
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Q1) The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.
A)True
B)False
Q2) A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?
A) entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
B) purchase principal only (po) strips that decline in value whenever interest rates rise.
C) enter into a short hedge where the bank agrees to sell interest rate futures.
D) sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
E) buying inverse floaters.
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Which of the following statements is most CORRECT?
A) federal bankruptcy law deals only with corporate bankruptcies. municipal and personal bankruptcy are governed solely by state laws.
B) all bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management.
C) chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. if a reorganization plan cannot be worked out under chapter 11, then the company will be liquidated as prescribed in chapter 7 of the act.
D) "restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call for changing the debt's maturity or its contractual interest rate.
E) our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.
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Chapter 26: Mergers and Corporate Control
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Q1) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
Q2) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
Q3) The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
A)True
B)False
Q4) The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.
A)True
B)False
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28
Chapter 27: Multinational Financial Management
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Q1) Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?
A) 1.12
B) 1.63
C) 1.82
D) 2.04
E) 3.64
Q2) A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?
A) 123.75 swiss francs
B) 454.55 swiss francs
C) 750.00 swiss francs
D) 1,237.50 swiss francs
E) 1,650.00 swiss francs
Q3) A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
A)True
B)False
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Chapter 28: Time Value of Money
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Questions
Q1) A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it?
A) $284,595
B) $299,574
C) $314,553
D) $330,281
E) $346,795
Q2) A time line is not meaningful unless all cash flows occur annually.
A)True B)False
Q3) Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan.
A)True B)False
Q4) A "growing annuity" is any cash flow stream that grows over time.
A)True B)False
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Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
249 Flashcards
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Sample Questions
Q1) Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?
A) $2,404.91
B) $2,531.49
C) $2,658.06
D) $2,790.96
E) $2,930.51
Q2) Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Billy have to pay in a 30-day month?
A) $120.83
B) $126.88
C) $133.22
D) $139.88
E) $146.87
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Page 31
Chapter 30: Pension Plan Management
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10 Verified Questions
10 Flashcards
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Sample Questions
Q1) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
Q3) From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Sample Questions
Q1) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q2) Which of the following statements about project risk analysis in not-for-profit firms is incorrect?
A) a project's corporate beta measures the contribution of the project to the overall corporate risk of the firm.
B) a project's corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.
C) a project's corporate beta is defined as ( p/ f)rpf, where p is the standard deviation of the project's returns, f is the standard deviation of the firm's returns, and rpf is the correlation among the two sets of returns.
D) in practice, it is usually difficult, if not impossible, to directly measure a project's corporate risk, so project risk analysis typically focuses on stand-alone risk.
E) the market risk of a project is not relevant to not-for-profit firms.
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