Strategic Financial Management
Practice Questions
Course Introduction
Strategic Financial Management focuses on the integration of financial strategies with corporate objectives to maximize firm value and ensure long-term sustainability. The course explores advanced topics such as capital budgeting, financial analysis, risk management, capital structure, mergers and acquisitions, and corporate governance. Students will learn to apply analytical tools and decision-making frameworks to real-world scenarios, enabling them to evaluate financial decisions in a strategic context and understand their implications for competitive advantage. Emphasis is placed on aligning financial policies with overall business strategies to achieve organizational goals in dynamic and complex market environments.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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Chapter 1: The Role and Objective of Financial Management
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Q1) The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to
A)separation of social responsibility and stakeholders' concerns
B)separation of ownership and control
C)separation of personal welfare and long-run profit goals
D)the granting of "golden parachute" contracts
Answer: B
Q2) The success of a firm is linked to its stakeholders.This group includes:
A)community neighbors
B)suppliers
C)employees
D)all of these
Answer: D
Q3) Examples of agency costs incurred by shareholders to minimize agency problems are:
A)Expenditures associated with independent auditing.
B)Expenditures associated with SEC approval.
C)Expenditures associated with monitoring management's actions
D)Expenditures associated with inventory control.
Answer: C
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) 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
Q2) Which of the following (if any) are not financial intermediaries?
A)commercial bank
B)thrift institution
C)securities broker
D)all are financial intermediaries
Answer: C
Q3) An investor decides to sell his stock based on information he received about some internal audit revealing that the company has severe financial problems. Trading on this information is called:
A)private trading
B)insider trading
C)options trading
D)information trading
Answer: B
Page 4
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Chapter 3: Evaluation of Financial Performance
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Q1) The financial analysis tool that takes into account the entire capital structure of the firm is the:
A)EBITDA multiple
B)the price to book ratio
C)the P/E ratio
D)the total asset turnover ratio
Answer: A
Q2) Firms with a positive economic value added (EVA):
A)have increasing growth in earnings
B)have an increasing rate of return on investment
C)have a return on capital greater than their cost of capital
D)have a high return on book value
Answer: C
Q3) The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be
A)liquidity ratios
B)financial leverage ratios
C)activity ratios
D)profitability ratios
Answer: A
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Chapter 4: Financial Planning and Forecasting
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Q1) In preparing a statement of cash flows, the method involves adjusting net income to reconcile it to net cash flows from operating activities.
A)direct
B)indirect
C)accrual
D)none of the answers is correct
Q2) The financial statement that shows the effects of a company's operating, investing, and financing activities on its cash balance is known as the:
A)cash budget statement
B)pro forma financial statement
C)statement of cash flows
D)breakeven analysis
Q3) A good operational plan incorporates a plan for:
A)the unionization of its business.
B)a solid organizational chart with detailed job descriptions.
C)the resources a firm will need to obtain its long term objectives.
D)all of the answers are correct
Q4) What information does a long-term financial plan offer?
Q5) Explain the cash flow generation process:
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Chapter 5: The Time Value of Money
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Q1) When using a present value of an annuity table (e.g., Table IV at the back of the book),
A)payments are assumed to be made at the beginning of each period
B)PVIFA factors decrease with an increase in the interest rate
C)PVIFA factors increase with an increase in the number of periods
D)b and c only
Q2) The effective rate of interest will always be the nominal rate. A)greater than B)equal to C)less than D)equal to or greater than
Q3) What is the difference between the nominal interest rate and the effective interest rate?
Q4) The difference between an ordinary annuity and an annuity due is:
A)the interest rate
B)the timing of the payments
C)the amount of the payments
D)the number of periods
Q5) Explain a perpetuity and list some investment vehicles that can be perpetuities.
Page 7
Q6) Explain the concept of interest and compare it to rate of interest.
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Chapter 5: A: The Time Value of Money
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Q1) What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?
A)$21,240
B)$11,080
C)$16,421
D)none of these
Q2) What is the value of $10,000 invested for 1 year at 8% compounded continuously?
A)$10,800
B)$10,833
C)$10,824
D)$11,268
Q3) With continuous compounding, why is the effective rate higher than the nominal rate?
Q4) With continuous compounding
A)the effective rate is higher than the nominal rate
B)the effective rate is higher than the logarithmic rate
C)the base "e" is the effective rate
D)all these are correct
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Q1) A refrigerator manufacturer, Zero King, issued a zero coupon bond with 10 years to maturity.What is the yield-to- maturity of this bond if it is sold for $352?
A)12.2%
B)10%
C)11%
D)9%
Q2) ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest.Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625.
A)5.0%
B)8.0%
C)3.1%
D)6.25%
Q3) An AT&T 5½05 bond with a current yield of 6.2% must be selling its face value. A)above
B)at
C)below
D)any of these could be correct
Q4) Explain a sinking fund.
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) Helix common stock currently sells for $30 and its current dividend is $1.50.If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?
A)13.5%
B)9.5%
C)10.0%
D)30.0%
Q2) Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are expected to grow in the future.What is the value of Zero-Sum's stock to an investor who requires a 14 percent rate of return?
A)$14.00
B)$10.00
C)$20.00
D)0
Q3) The book value of an asset represents
A)the market value
B)the discounted cash flow value
C)the historic acquisition cost of the asset
D)stockholders' acquisition value
Page 10
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Chapter 8: Analysis of Risk and Return
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Q1) A portfolio is efficient if .
A)for a given standard deviation, there is no other portfolio with a higher expected return
B)for a given expected return, there is no other portfolio with a lower standard deviation
C)its standard deviation is equal to -1.0
D)for a given standard deviation, there is no other portfolio with a higher expected return and if, for a given expected return, there is no other portfolio with a lower standard deviation
Q2) HDTV has planned on diversifying into the dual-VCR field.As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%.The expected market return, km, is 14%;the risk free rate, rf, is 7%;and the current dividend, Do, is $0.50.Should HDTV go into the dual-VCR field?
A)No-stock price decrease
$7.82
B)Yes-stock price increase $9.89
C)Yes-stock price increase $3.81
D)No-stock price decrease $3.78
Q3) List types of events that influence systematic (non-diversifiable) risk.
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Q1) What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero.The replacement investment will reduce operating costs by $6,600 a year.
A)$48,300
B)$54,900
C)$43,500
D)$51,000
Q2) The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
A)independent projects
B)mutually exclusive projects
C)contingent projects
D)separable projects
Q3) 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
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Q1) How does the profitability index differ from the net present value and when would each method be preferred?
Q2) The value additivity principle indicates that, when a firm undertakes an independent project, the value of the firm is increased by the from the project.
A)present value of the cash inflows
B)sum of the cash inflows and outflows
C)net present value
D)none of these
Q3) 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 these
Q4) The profitability index is the ratio of the to the .
A)net present value, net investment
B)net investment, net present value
C)present value of future net cash flows, net investment
D)net investment, present value of future net cash flows
Page 13
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Rollerblade, a maker of skating gear, is evaluating two alternative presses.Press A costs $88,000, has a 4 year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years.Press B costs $122,000, has an 8 year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years.The cost of replacement for A is $96,000 and the replacement press will generate cash inflows of $30,100 for another 4 years.Rollerblade uses a 12% cost of capital.Which press should be chosen?
A)A
B)B
C)both A and B
D)neither A or B
Q2) The advantage(s) of the equivalent annual annuity method over the replacement chain technique in evaluating mutually exclusive investments having unequal lives include
A)the equivalent annual annuity method is often computationally simpler
B)the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method
C)the equivalent annual annuity method is theoretically superior
D)a and b only
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Chapter 11: Capital Budgeting and Risk
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Q1) When is the risk-adjusted discount rate approach considered preferable to the weighted cost of capital approach in determining the net present value of a project?
A)It is preferable when the projects under consideration differ significantly in the number of cash flows generated by the projects.
B)It is preferable when the projects under consideration differ significantly in their total return.
C)It is preferable when the projects under consideration differ significantly in their cash inflows.
D)It is preferable when the projects under consideration differ significantly in their risk characteristics.
Q2) The certainty equivalent approach is a risk evaluation technique.Which of the following statements is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Q1) Crickentree has a target capital structure of 30 percent debt and 70 percent equity.If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40 percent, what will be its equity break point?
A)$2,428,571
B)$1,457,143
C)$3,400,000
D)$971,429
Q2) The cost of internal equity is cheaper than the cost of external equity.Which of the following statements is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) Rank in ascending order (lowest to highest) the relative riskiness of the various types of corporate and government securities.
A)common stock, preferred stock, corporate debt, long-term government debt
B)corporate debt, long-term government debt, preferred stock, common stock
C)long-term government debt, corporate debt, preferred stock, common stock
D)corporate debt, preferred stock, long-term government debt, common stock
Page 16
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Chapter 13: Capital Structure Concepts
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Q1) RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt.The firm's cost of equity is 14 percent and its cost of debt is 9 percent.If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40 percent, what is the market value of RoTek? Assume all net income is paid out as dividends.
A)$698,571
B)$814,286
C)$818,571
D)$55,800
Q2) Protection for debt holders takes the form of protective covenants in the bond indenture.These covenants place restrictions on which of the following activities?
A)the sale of assets
B)payment of dividends
C)the issuance of additional debt
D)all of these are typical protective covenants
Q3) Explain how industry effects need to be considered in the capital structure decision.
Q4) There are many factors that influence a firm's business risk.List them.
Q5) How do signaling effects impact the firm's capital structure decision?
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Chapter 14: Capital Structure Management in Practice
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Q1) Weis Products has fixed operating costs of $20 million and a variable cost ratio of 0.55.Weis has 4 million common shares outstanding and a marginal tax rate of 45%.What is Weis's degree of operating leverage at an expected sales level of $150 million?
A)1.00
B)1.74
C)1.42
D)1.32
Q2) In what way does management's willingness to assume risk impact the firm?
Q3) When fixed capital costs are incurred by the firm, a change in is magnified into a larger change in earnings per share.
A)earnings before interest and taxes
B)overhead expenses
C)interest charges
D)preferred dividends
Q4) Rent, insurance, and the salaries of top management are examples of:
A)fixed costs
B)capital costs
C)variable costs
D)fluctuating costs
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Chapter 14: A: Capital Structure Management in Practice
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Q1) Breakeven analysis can be used to assess risk.
A)financial
B)operating
C)sales
D)volume
Q2) The difference between the selling price per unit and the variable cost per unit is the:
A)contribution to the bottom line
B)contribution to revenue
C)contribution margin
D)contribution to EBIT
Q3) In a graphic breakeven analysis, the point where total revenue is less than total cost indicates that the firm has:
A)net operating capital
B)cash flow from investing
C)a negative EBIT
D)a positive return on capital
Q4) How can a firm have more than one breakeven output point?
Q5) List the limitations of breakeven analysis:
Q6) What are the possible uses for breakeven analysis?
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Chapter 15: Dividend Policy
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Q1) According to the dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders.
A)constant payout ratio
B)stable dollar
C)passive residual
D)reinvestment
Q2) What is a DRIP and how does it work?
Q3) The fundamental question in dividend policy is
A)the tax consideration
B)the amount of growth the firm considers optimal
C)not violating any restrictive covenants
D)determining what portion of earnings will be paid out
Q4) The dividend clientele effect concept was originally developed by
A)Myron Gordon
B)Merton Miller and Franco Modigliani
C)Milton Friedman
D)Paul Samuelson
Q5) Explain the "clientele effect."
Q6) What are the factors that determine the dividend policy of a firm?
Q7) What are the procedures for repurchasing stock?
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Chapter 16: Working Capital Management
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Q1) Net working capital is defined as:
A)total current assets
B)current assets minus current liabilities
C)total assets minus total liabilities
D)current assets plus current liabilities
Q2) All other things being equal, a policy of holding a relatively proportion of the firm's total assets in the form of current assets will tend to result in a risk of the firm encountering financial difficulties.
A)large, higher
B)small, higher
C)constant, higher
D)constant, lower
Q3) The rate of return on fixed assets is normally assumed to be the rate of return on current assets (especially cash and marketable securities).
A)less than
B)greater than
C)equal to
D)none of these answers is correct.
Q4) What are the classifications for short-term lenders and how do they differ?
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Amazon's CFO is considering the fees charged by two banks in trying to determine which is best for her firm.First American charges a flat $0.11 per payment and First Western requires a minimum compensating balance of $500,000 plus $0.05 per payment.If Amazon's cost of funds is 8.50%, and the expected number of payments per year is 900,000, which bank should be chosen?
A)FW, savings = $54,000
B)FA, savings = $23,000
C)FW, savings = $11,500
D)FW, savings = $18,500
Q2) The fastest method for moving funds between banks is
A)special courier services
B)wire transfers
C)drafts
D)float
Q3) The "shortage" costs associated with inadequate liquid asset balances include all of the following except
A)deterioration of the firm's credit rating
B)foregone cash discounts
C)lost sales
D)possible financial insolvency
Page 22
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) Tool Mart sells 1,400 electronic water pumps every year.These pumps cost $54.30 each.If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the total annual inventory costs?
A)$1,923
B)$1,281
C)$3,406
D)$3,762
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) Character, which is one of the traditional "five Cs" of credit analysis, refers to A)the ability of the applicant to meet its financial obligations (i.e., liquidity and cash flow)
B)the general economic climate and its effect on the applicant's ability to pay
C)the financial strength of the applicant (i.e., net worth)
D)the willingness of the applicant to meet its financial obligations
Q4) What are seasonal datings as it applies to credit terms?
Page 23
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) Lessees with are most likely to use leveraged leases for large transactions.
A)low profit levels
B)large amounts of tax exempt income
C)low profits and high amounts of tax-exempt income
D)outlays of less than $300,000
Q2) A capital lease is considered a(n) agreement.
A)negotiable
B)cancelable
C)noncancelable
D)short-term
Q3) All of the following are first determined by the lessee before a direct lease EXCEPT:
A)Equipment that will be leased
B)What taxes will be paid based on the lease
C)Options, warranties service agreements that will have to be made
D)What price will be paid for the asset
Q4) Explain a leveraged lease.
Q5) 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?
Q6) In a leveraged lease, what items secure the mortgage bonds of the lender?
Page 24
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Chapter 20: Financing with Derivatives
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Q1) As a financing device, warrants have been used in connection with A)bond swaps
B)equity offerings
C)debt restructurings and bond swaps
D)bond swaps, equity offerings, and debt restructurings
Q2) The Ogden Company has warrants outstanding that entitle the holder to purchase 4 shares of the company's common stock at an exercise price of $20 per share.The market price of the warrants is $30 and the common stock price is $25.Determine the premium over the formula value that the warrants are selling for.
A)$20
B)$25
C)$10
D)$30
Q3) earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares.
A)Primary
B)Full primary
C)Fully diluted
D)First class
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Chapter 20: A: Financing with Derivatives
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Q1) What is the principal inflow and what is the principal outflow from a bond refunding situation?
Q2) Wood River Power Company is considering refunding a $100 million 12% coupon debenture issue with a 9% coupon, 20-year debenture.The 12% issue also matures in 20 years and is now callable at 109% of par.The unamortized flotation cost on the old issue is $360,000 and the flotation cost of the new issue is 0.775%.Wood River estimated that there would be a 4 week period where both bonds would be outstanding.The company has a weighted cost of capital of 11% and a 40% marginal tax rate.Should Wood River sell the refunding issue? (Note: PVIFA0.054,20 = 12.050)
A)yes, NPV is approximately $15.21 million
B)yes, NPV is approximately $9.86
C)yes, NPV is approximately 6.485 million
D)No, NPV is negative $0.554 million
Q3) In considering the bond refunding analysis, which of the following statements is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
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Chapter 21: Risk Management
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Q1) Which of the following is the current price in a futures contract?
A)volatile price
B)spot price
C)short price
D)long price
Q2) What is a hedge?
Q3) Acquisition of additional information can be accomplished by all of the following EXCEPT:
A)Employing individuals or firms with the needed expertise
B)Test-marketing
C)Paying to have new issues of bonds "rated"
D)Changing the location of the distributorship
Q4) Forward contracts are most common in markets.
A)stock
B)agricultural
C)currency
D)bond
Q5) How does hedging reduce or eliminate business risks?
Q6) List several reasons why a firm may choose to employ risk management techniques.
Q7) List five hedging strategies for risk management
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Chapter 22: International Financial Management
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Q1) A less restrictive form of purchasing power parity is:
A)Omnipotent purchasing power parity
B)Relative purchasing power parity
C)Absolute purchasing power parity
D)Exchange parity
Q2) What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?
A)0.43%
B)1.50%
C)6.35%
D)1.46%
Q3) The states that the differences in interest rates between two countries should be offset by equal, but opposite, changes in the future spot exchange rate.
A)expectations theory
B)interest rate parity
C)purchasing power parity
D)international Fisher effect
Q4) Name the factors that affect exchange rates.
Q5) How does a firm manage economic exposure due to changes in exchange rates?
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Chapter 23: Corporate Restructuring
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Sample Questions
Q1) The reasons why a company may choose external growth by merger over internal growth include
A)economies of scale
B)more rapid growth
C)tax considerations and rapid growth
D)economies of scale, tax considerations, and more rapid growth
Q2) What are the total assets and stockholders' equity (in $ millions) if the purchase method is used as the accounting method for this merger?
A)$130, $63
B)$130, $67
C)$132, $65
D)$132, $67
Q3) The most correct method of valuing a merger candidate is:
A)adjusted book value method
B)discounted cash flow method
C)pooling of interests method
D)comparative price-earnings ratio method
Q4) There are three methods for valuing merger candidates.Briefly explain each of them.
Q5) A new takeover defense is boardmail.How does it work?
To view all questions and flashcards with answers, click on the resource link above. Page 29