Guide to Financial Management Course Number: 6431

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1 Guide to Financial Management Course Number: 6431 Test Questions: 1. Objectives of managerial finance do not include: A. Employee profits. B. Stockholders wealth maximization. C. Profit maximization. D. Social responsibility. 2. Stockholder wealth maximization advantages do not include: A. Emphasizes the long term. B. Maximizes short-term profits. C. Recognizes risk or uncertainty. D. Recognizes the timing of returns. 3. Which one of the following is not a policy decision that by itself is likely to affect the value of the firm? A. Investment in a project with a large net present value. B. Promotion of more aggressive and creative accounting practices C. Sale of a risky division that will now increase the credit rating of the entire company. D. Use of a more highly leveraged capital structure that resulted in lower cost of capital. 4. Financial managers do all EXCEPT: A. Financial analysis and planning. B. Making investment decisions. C. Making financial and capital structure decisions. D. Posting payroll deductions.

2 5. In capital markets, the primary market is concerned with the provision of new funds for capital investments through A. New issues of bond and stock securities. B. Exchanges of existing bond and stock securities. C. The sale of forward or future commodities contracts. D. New issues of bond and stock securities and exchanges of existing bond and stock securities. 6. Which of the following is NOT considered a financial institution? A. Commercial banks. B. Money markets. C. Pension funds. D. Credit unions. 7. The basic financial statements include a A. Balance sheet and income statement. B. Statement of financial position and income statement. C. Balance sheet, statement of financial position, and income statement. D. Balance sheet, income statement, and statement of cash flows. 8. The primary purpose of the balance sheet is to reflect A. The fair value of the firm s assets at some moment in time. B. The status of the firm s assets in case of forced liquidation of the firm. C. The firm s potential for growth in stock values in the stock market. D. Assets, liabilities, and equity (net worth). 9. A statement of cash flows is to be presented in general purpose external financial statements by which of the following? A. Publicly held business enterprises only. B. Privately held business enterprises only. C. All business enterprises. D. All business enterprises and not-for-profit organizations.

3 10. A statement of cash flows is intended to help users of financial statements A. Evaluation a firm s liquidity and ability to pay its debts. B. Evaluate a firm s economic resources and obligations. C. Determine a firm s components of income from operations. D. Determine whether insiders have sold or purchased the firm s stock. 11. A financial statement includes all of the following items: net income, depreciation, operating activities, and financing activities. What financial statement is this? A. Balance sheet. B. Income statement. C. Statement of cash flows. D. Statement of shareholders equity. 12. Footnote disclosures usually do NOT include: A. Accounting methods. B. Statement of changes in stockholders equity. C. Inventory pricing. D. Pension fund. 13. A segment is reportable if any one of the following conditions exist EXCEPT: A. Revenue is 10% or more of total corporate revenue. B. Operating profit is 10% or more of total corporate operating profit. C. Identifiable assets are 10% or more of total corporate assets. D. Foreign operations provide 3%or more of total corporate sales. 14. The Section 404 of the Sarbanes-Oxley Act requires additional reports on the effectiveness of internal control over financial reporting: A. 2 B. 3 C. 1

4 D Factors that an investor considers in evaluating a firm s stock include all EXCEPT: A. Financial health. B. Industry factors. C. Number of future investors. D. Future outlook of the company. 16. Which of the following is an example of leverage ratios? A. Times interest earned. B. Quick ratio. C. Payout ratio. D. Return on equity. 17. Which of the following is NOT a source of industry statistics? A. Annual Statement Studies. B. The FTC Quarterly Report. C. Value Line. D. Standard and Poor's Industry Surveys. 18. Which of the following is an example of liquidity ratios? A. Times interest earned. B. Quick ratio. C. Return on equity. D. P/E ratio. 19. If the debt ratio is 0.5 what is the debt-equity ratio? A. 0.5 B. 1.0 C. 1.5

5 D Given the following data: Sales = 2000; Cost of goods sold = 1500; Average receivables = 100, calculate the average collection period: A B C. 137 D Gross profit margin is: A. Gross profits divided by net sales. B. Net sales divided by gross profit. C. Sales multiplied by gross profit. D. Average assets multiplied by gross profits. 22. Free cash flow (FCF) is cash flow from operations minus cash used to purchase fixed assets minus. A. Cash dividends. B. Stock dividends. C. Share repurchase. D. Debt. 23. Market value added (MVA) is minus equity capital supplied by shareholders. A. Economic value added B. Market value C. Price-earnings ratio (multiple) D. Book value per share 24. Which of the following is NOT true regarding the ROI breakdown, known as the Du Pont formula? A. The importance of turnover as a key to overall return on investment is emphasized in the breakdown.

6 B. Turnover is not as important as profit margin in enhancing overall return. C. The importance of sales is explicitly recognized. D. The margin and turnover complement each other. In other words, a low turnover can be made up by a high margin; and vice versa. 25. Return on Investment (ROI) can NOT be enhanced by management: A. Improving margin. B. Improving turnover. C. Improving both turnover and margin. D. Improving liquidity. 26. Margins may be increased by all EXCEPT: A. Reducing expenses. B. Reducing turnover. C. Raising selling prices. D. Increasing sales faster than expenses. 27. Another version of the Du Pont formula, called the modified Du Pont formula, reflects the effect of using other people s money. The formula ties together the return on investment (ROI) and: A. Operating leverage. B. Total leverage. C. Financial leverage. D. Times interest earned. 28. The equity multiplier is NOT equal to: A. (total assets? / (stockholders equity) B. (total assets) / (total liabilities) C. 1 / [1-(total liabilities)/(total assets)] D. 1 / (1 debt ratio) 29. Basic steps in projecting financial needs by percent of sales method include all EXCEPT:

7 A. Project the firm s sales. B. Project expenses. C. Estimate rate of return. D. Estimate level in current and fixed assets. 30. Which of the following is NOT a major step in preparing the budget? A. Prepare a sales forecast B. Formulate present value C. Estimate manufacturing costs and operating expenses D. Determine cash flow and other financial effects 31. Which of the following statements is NOT true regarding the cash budget? A. It aids in avoiding unnecessary idle cash and possible cash shortages. B. It helps management keep cash balances in reasonable relationship to its needs. C. It presents the expected cash inflow and outflow for a designated time period. D. The cash budget consists typically of three major sections: cash surplus or deficit, operating, financing, and investments. 32. The concept of The Time value of Money refers to: A. A dollar has the same value now as in the future. B. A dollar in the past had less value than now. C. A dollar now is worth more than a dollar to be received later. D. A dollar value is constant in time. 33. The annuity is defined as a series of payments or receipts: A. Of a variable amount for a definite period. B. Of a variable amount for an indefinite period. C. Of a fixed amount for an indefinite period. D. Of a fixed amount for a specific number of periods. 34. Present value of $110,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is:

8 A. $121,000 B. $100,000 C. $110,000 D. $105, The minimum rate of return is also called: A. Internal rate of return. B. Rate of return. C. Cost of capital. D. Time-adjusted rate of return. E. 36. The return of an investment consists of the following sources of income EXCEPT: A. Current income. B. Preferred return. C. Appreciation or depreciation. D. Capital gains or losses. 37. What is the risk and the risk-return trade-off: A. The lesser the risk, the greater the return expected. B. The greater the risk, the greater the return expected. C. The greater the investment, the lesser the risk expected. D. The greater the investment, the greater the return expected. 38. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return, which is adjusted by the company s beta. Assume that rf=6%, and rm=10% If DQZ s has a beta of 2.0, what is DQZ s expected rate of return? A % B %

9 C. 7.20% D % 39. Beta does NOT measure the following: A. Systematic risk B. Purchasing power risk C. Market risks D. Diversifiable risk 40. The arbitrage pricing theory (APM) explains asset returns in terms of multiple macroeconomic factors. Assume the macroeconomic variables are the gross domestic product, inflation, real interest rates, differences in yields of different grades of corporate bonds, and differences in yields on long versus short-term government bonds. The market return or risk premium (RPi ) and the sensitivity or beta coefficient (bi) for each variable are given below: Variable 1 RPi=.03, bi=.5; Variable 2 RPi=.04, bi=.3; Variable 3 RPi=.07, bi=.3; Variable 4 RPi=.05, bi=.4; Variable 5 RPi=.03, bi=.6. If the risk-free interest rate is 5%, what is the expected rate of return according to the APM? A. 13.6% B. 10.3% C. 8.3% D. 5.0% 41. The valuation process for a bond does NOT require knowledge of: A. Amount and timing of cash flows to be received by investor B. Present bond price C. Maturity date of the bond D. Investor s required rate of return 42. Preferred stock is like common stock EXCEPT that: A. It represents equity ownership. B. Its dividend is fixed for the life of the issue. C. It offers control of the firm. D. It pays dividends.

10 43. Which of the following is directly applied in determining the value of a stock when using the dividend growth model? A. The firm s capital structure. B. The firm s cash flows. C. The firm s liquidity. D. The investor s required rate of return on the firm s stock. 44. Assume that interest rates just declined substantially but that the expected future dividends for a company over the long run were not affected. As a result of the decrease in required rates of return, according to the Gordon s valuation model, the company s stock price should A. Increase. B. Decrease. C. Stay constant. D. Change, but in no obvious direction. 45. The market value of a firm s outstanding common shares will be higher, everything else equal, according to the Gordon s valuation model, if A. Investors have a higher required return. B. Investors expect higher dividend growth. C. Investors have longer expected holding periods. D. Investors have shorter expected holding periods. 46. Determine the cost of equity capital for a firm with a stock price of $50.00, an estimated dividend at the end of the first year of $5.00 per share, and an expected growth rate of 11.1%. A. 21.1% B. 11.0% C. 10.0% D. 20.0% 47. If the before-tax cost of debt is 10% and the corporate tax rate is 30%, calculate the after-tax cost of debt:

11 A. 10% B. 3% C. 7% D. 13% 48. The cost of equity capital (or common stock) for a firm is A. The required rate of return on the company's stock. B. The yield to maturity on the bond. C. The risk-free rate. D. The market risk premium. 49. weights are NOT used in computing the overall cost of capital. A. Historical B. Target C. Marginal D. Projected 50. The capital budget is a(n) A. Plan to insure that there are sufficient funds available for the operating needs of the company. B. Exercise that sets the long-range goals of the company including the consideration of the company including the consideration of external influences. C. Plan that coordinates and communicates a company s plan for the coming year to all departments and divisions. D. Plan that assesses the long-term needs of the company for plant and equipment purchases. E. 51. In order to grow companies, make all but one of the following investment decisions: A. Keep or sell a business segment. B. Lease or buy. C. Decrease turnover.

12 D. Which asset to invest in. 52. Conditions under which mutually exclusive investments create contrary rankings include all EXCEPT: A. Projects that have different life expectancies. B. Projects that have different sizes of investment. C. The cost of capital gives a close approximation for the market rate of return. D. One project increases in cost while another decreases in time. 53. The easiest and most popular method of calculating depreciation is: A. Straight-line method. B. Sum-of-the-years digit method. C. Double-declining-balance method. D. Modified accelerated cost recovery system. 54. Leverage is that portion of fixed costs which: A. Represents a risk to the firm. B. Represents a risk to the investors. C. Represents a risk to the clients. D. Represents all of the above. 55. A company has unit sales of 300,000, the unit variable cost is $1.50, the unit sales price is $2.00, and the annual fixed costs are $50,000. Furthermore, the annual interest expense is $20,000, and the company has no preferred stock. Accordingly, the degree of total leverage is: A B C D What is the primary objective of capital structure decisions? A. Maximize the firm s liquidity.

13 B. Minimize the firm s overall weighted cost of capital. C. Minimize the firm s market value. D. Maximize the firm s degree of operating leverage. 57. Capital structures decisions are influenced by all EXCEPT: A. Growth rate and stability of future sales B. Asset makeup of the individual firm C. Control status of market forces D. The business risk to which the firm is exposed 58. Working capital is the difference between A. Current assets and current liabilities. B. Fixed assets and fixed liabilities. C. Total assets and total liabilities. D. Shareholders investment and cash. 59. During the year, Mason Company s current assets increased by $120, current liabilities decreased by $50. How much did working capital change? A. Increased by $70. B. Did not change. C. Decreased by $170. D. Increased by $ A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that A. Net profit has increased. B. The average collection period has decreased. C. Gross profit has declined. D. The size of the discount offered has decreased. 61. Types of delays in processing checks include all EXCEPT:

14 A. Mail float. B. Processing float. C. Deposit collection float. D. Credit float. 62. What is a working capital technique that increases the payable float and therefore delays the outflow of cash? A. Concentration banking. B. A draft. C. Electronic Data Interchange (EDI). D. A lockbox system. 63. Ardmore Industries is in the process of reviewing its inventory and production policies. The company often has an excess supply of some products and shortages of other products needed for planned production runs. What is the method that Ardmore should use to establish its inventory policies regarding these products? A. Linear programming. B. Regression analysis. C. Economic order quantity (EOQ). D. Contribution margin analysis 64. What does the economic order quantity (EOQ) formula assume? A. That purchase costs per unit differ because of quantity discounts. B. That costs of placing an order vary with quantity ordered. C. That periodic demand for the good is known. D. That erratic usage rates are cushioned by safety stocks. 65. What will a decrease in inventory ordering costs do? A. Decrease the order quantity B. Increase the reorder point C. Have no effect on the order quantity D. Decrease the carrying cost percentage

15 66. The ABC Inventory Control Method: A. Segregates merchandise into components based on quantity B. Computes annual dollar usage by grade C. Ranks inventory in terms of dollar usage D. Works just like JIT. 67. Which of the following is the credit instrument known as a banker s acceptance? A. Calls for immediate payment upon delivery of the shipping documents to the bank s customer and acceptance of goods by the bank. B. An invoice being signed by the banker upon receipt of goods, after which both the banker and the seller record the transaction on their respective books. C. A time draft payable on a specified date and guaranteed by the bank. D. A method of sales financing in which the bank retains title to the goods until the buyer has completed payment. 68. Short-term financing is: A. Less important than long-term financing. B. Conceptually, more difficult to arrange than long-term financing. C. Easier to arrange than long-term financing. D. Necessary for capital budgeting decisions. 69. Seasonal cash shortfalls and desired inventory buildups are among the reasons to use A. Banker's acceptances. B. Call options. C. Commercial paper. D. Unsecured bank loans. 70. In general, why is it more expensive for a company to finance with equity capital than with debt capital? A. Long-term bonds have a maturity date and must therefore be repaid in the future. B. Investors are exposed to greater risk with equity capital. C. Equity capital is in greater demand than debt capital.

16 D. Dividends fluctuate to a greater extent than interest rates. 71. Zero-coupon bonds: A. Sell for a small fraction of their face value because their yield is much lower than the market rate. B. Increase in value each year as they approach maturity, providing the owner with the total payoff at maturity. C. Are redeemable in measures of a commodity such as barrels of oil, tons of coal, or ounces of rare metal (e.g., silver). D. Are high-interest-rate, high-risk, unsecured bonds that have been used extensively to finance leveraged buyouts. 72. What is an advantage of issuing new securities to the public? A. Stock prices accurately reflect the true net worth of the company. B. Pressure is applied from outside shareholders for earnings growth. C. The liquidity of the firm s stock increases. D. Self-dealing by corporate insiders is limited. 73. What is the date when the right to a dividend expires called? A. Declaration date. B. Ex-dividend date. C. Date of record. D. Payment date. 74. An equity issue sold to the firm's existing stockholders is called: A. A rights offer. B. A general cash offer. C. A private placement. D. A discriminatory-price auction. 75. Mirage Corporation has 1,000,000 shares outstanding. It wishes to issue 250,000 new shares using rights issue. How many rights are needed to buy one new share? A. 1 right/share

17 B. 2 rights/share C. 3 rights/share D. 4 rights/share 76. A potential investor may obtain information about a firm making a new securities issue from which of the following publications? A. Registration statement sent by its broker B. Prospectus C. Letter of comment D. Regulation A filing 77. All of the following are examples of services normally offered by investment bankers EXCEPT: A. Securities sales. B. Consultation on the offering price. C. Underwriting. D. Checking accounts to corporations. 78. In what way do investment bankers make money under best efforts offerings? A. By receiving the difference between the purchasing price and the offering price. B. By receiving a commission. C. By receiving a discount of the difference between the purchasing price and the offering price. D. By purchasing unsold securities for their own account. 79. What is a sale of securities to a very few parties that is exempt from registration with the SEC known as? A. Cash offer B. Rights offer C. Private placement D. Shelf registration

18 80. The unique features of financial management of a multinational corporation (MNC) include: Multiple currency problems, various legal problems, institutional and economic constraints, and A. Internal control problems. B. Translation problems. C. Accounting exposure. D. Operations exposure. 81. typically involve contracts for the planning, design, and construction of operating facilities for a fee. A. Management contracts. B. Turnkey operations. C. Joint ventures D. Greenfield development. 82. Exchange rates may be in terms of dollars per foreign currency or units of foreign currency per dollars, which is called an: A. Cross rates. B. Indirect quote. C. Spot rates. D. Premium quote. 83. What is a foreign exchange rate? A. The ratio of one country's cost-of-living index to that of another country. B. The price of one country's currency in units of another country's currency. C. The ratio of one country's imports to its exports. D. The difference obtained by subtracting a country's exports from its imports. 84. What is a cross rate? A. The quotation received indirectly from a foreign correspondent bank. B. The exchange rate between two currencies derived by dividing each currency's exchange rate with a third currency. C. The price given as units of home currency per unit of foreign currency.

19 D. The quotation that does not apply directly to forward transactions. 85. What is a "forward" transaction? A. It is at a premium over the spot rate. B. It means that delivery and payment must be made within one business day (Canada) or two business days after the transaction date. C. It calls for delivery of a currency at a fixed future date at a fixed rate of exchange. D. It sets the future date when delivery of a currency must be made at an unknown spot exchange rate. 86. A direct quote is when A. The quotation is received directly from a foreign correspondent bank. B. The price is in units of foreign currency needed to buy one unit of home currency. C. The price is given as units of home currency per unit of foreign currency. D. The quotation applies directly to forward transactions. 87. the potential for the change in the present value of future cash flows due to an unexpected change in the exchange rate. A. Transaction exposure. B. Operating exposure. C. Translation exposure. D. Accounting exposure. 88. The potential for an increase or decrease in the parent s net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations is called A. Economic Exposure. B. Operating Exposure. C. Translation Exposure. D. Strategic Exposure. 89. Hedging A. Increases the variability of expected cash flows.

20 B. Increases the variability of reported profits. C. Reduces the chance of unexpected price changes. D. Decreases the spread between spot and forward market quotes. 90. All of the following operating strategies are used for the management of transaction exposure EXCEPT: A. Leading and lagging accounts receivable and payable. B. Buying or selling foreign exchange in the forward market. C. Borrowing in foreign currency markets with foreign currency receivables as collateral. D. Substituting debt for equity in a debt/equity swap. 91. What is the primary method by which a firm may protect itself against operating exposure impacts? A. Money market hedges. B. Diversification of operations. C. Forward contract hedges. D. Balance sheet hedging. 92. Operating exposure A. Creates foreign exchange accounting gains and losses. B. Causes exchange rates to fluctuate. C. Is the possibility that future cash flows will change due to an unexpected change in foreign exchange rates. D. Measures a country's propensity to import and export. 93. What is the objective of operating exposure management? A. To eliminate the foreign exchange losses resulting from the settlement of outstanding financial obligations which are valued in a foreign currency. B. To maximize the foreign exchange gains resulting from the settlement of outstanding financial obligations which are valued in a foreign currency. C. To anticipate and influence the effect of unexpected changes in exchange rates on a firm s future cash flows. D. To anticipate and influence the effect of expected changes in exchange rates on the firm s financial statements.

21 94. Forward (or futures) exchange contracts can be purchased or sold to guard against changes in exchange rates during a period of contract or exposure to risk from such changes. What is this process known as? A. Exposure. B. Hedging. C. Positioning. D. Parity. 95. Buying insurance policies for political risks are called A. Adaptation. B. Diversification. C. Risk transfer. D. Avoidance. 96. Interest Rate Parity (IRP) states: A. Interest rate should change in an equal amount but in the opposite direction to the difference in inflation rate between two countries. B. The difference in the national interest rates for securities of similar risk and maturity should be equal to, but opposite in sign to, the forward rate discount or premium for the foreign currency, except for transaction costs. C. Nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation. D. The interest rates between two countries start in equilibrium, any change in the differential rate of inflation between the two countries tends to be offset over the long-run by an equal but opposite change in the spot exchange rate. 97. What is the mathematical relationship that links changes in exchange rates and changes in price level called? A. Purchasing Power Parity. B. The Law of One Price. C. The Fisher effect. D. Efficient Market Theory. 98. Independent services that provide political risk rating include: Country Risk Rating, Economist Intelligence Unit, and

22 A. International Country Risk Guide. B. Monetary rating guide. C. United Kingdom Parity rate Guide. D. Japanese Hedging Rate Manual. 99. Which of the following is an acceptable method of adjusting for risk when analyzing the prospects of a foreign investment? A. Adjusting the discount rate. B. Adjusting the cash flows. C. Conducting sensitivity and scenario analysis. D. All of the above are acceptable What is a Eurodollar? A. A dollar bank deposit in a bank outside of the United States. B. A currency issued by the World Bank and pegged to the U.S. dollar. C. Another name for a Special Drawing Right (SDR). D. A dollar draft issued by the Bank for International Settlements (BIS) in Switzerland.

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