CHAPTER – 1

THE ROLE OF FINANCIAL MANAGEMENT

1. "Shareholder wealth" in a firm is represented by:

the number of people employed in the firm.
the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.

2. The long-run objective of financial management is to:

maximize earnings per share.
maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.

3. What are the earnings per share (EPS) for a company that earned $100,000 last year
in after-tax profits, has 200,000 common shares outstanding and $1.2 million in retained
earning at the year end?
$100,000
$6.00
$0.50
$6.50

4. A(n) would be an example of a principal, while a(n) would be an

example of an agent.
shareholder; manager
manager; owner
accountant; bondholder
shareholder; bondholder

5. The market price of a share of common stock is determined by:

the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.
6. The focal point of financial management in a firm is:
the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.
the dollars profits earned by the firm.

7. The decision function of financial management can be broken down into the
decisions.
financing and investment
investment, financing, and asset management
financing and dividend
capital budgeting, cash management, and credit management

8. The controller's responsibilities are primarily in nature, while the treasurer's

responsibilities are primarily related to .
operational; financial management
financial management; accounting
accounting; financial management
financial management; operations

9. In the US, the has been given the power to adopt auditing, quality control,
ethics, and disclosure standards for public companies and their auditors as well as
investigate and discipline those involved.
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)

10. A company's is (are) potentially the most effective instrument of good

corporate governance.
common stock shareholders
board of directors
top executive officers
11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a series of corporate scandals involving Enron, WorldCom, Global Crossing,

Tyco and numerous others.

a dramatic rise in the US trade deficit.
charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial
accounting for stock options.

12. ___________ refers to meeting the needs of the present without compromising the
ability of future generations to meet their own needs.
Corporate Social Responsibility (CSR)
Sustainability
Convergence
Green Economics
 CHAPTER – 2

RISK AND RETURN

1. This type of risk is avoidable through proper diversification.
portfolio risk
systematic risk
unsystematic risk
total risk

2. A statistical measure of the degree to which two variables (e.g., securities' returns)
move together.
coefficient of variation
variance
covariance
certainty equivalent

3. An "aggressive" common stock would have a "beta"

equal to zero.
greater than one.
equal to one.
less than one.

4. A line that describes the relationship between an individual security's returns and
returns on the market portfolio.
characteristic line
security market line
capital market line
beta

5. According to the capital-asset pricing model (CAPM), a security's expected

(required) return is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
6. The risk-free security has a beta equal to , while the market portfolio's
beta is equal to .
one; more than one.
one; less than one.
zero; one.
less than zero; more than zero.

7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than
the gamble's expected value. Carrie shows
risk aversion.
risk preference.
risk indifference.
a strange outlook on life.

8. Beta is the slope of

the security market line.
the capital market line.
a characteristic line.
the CAPM.

9. A measure of "risk per unit of expected return."

standard deviation
coefficient of variation
correlation coefficient
beta

10. The greater the beta, the of the security involved.

greater the unavoidable risk
greater the avoidable risk
less the unavoidable risk
less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite
Company common stock has a beta of 1.80. The expected return on the market is 10
percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model
(CAPM) and making use of the information above, the required return on Plaid Pants'
common stock should be , and the required return on Acme's common stock should
be .
3.6 percent; 7.2 percent
9.6 percent; 13.2 percent
9.0 percent; 18.0 percent
14.0 percent; 23.0 percent

12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to
be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the
company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for
Espinosa's common stock, that adjusted beta would most likely be .
less than 0.75
more than 0.75, but less than 1.10
equal to 1.10
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
 CHAPTER – 3

FUNDS ANALYSIS, CASH FLOW ANALYSIS, AND FINANCIAL PLANNING

1. According to the accounting profession, which of the following would be considered

a cash-flow item from an "investing" activity?
cash inflow from interest income.
cash inflow from dividend income.
cash outflow to acquire fixed assets.
all of the above.

2. According to the Financial Accounting Standards Board (FASB), which of the

following is a cash flow from a "financing" activity?
cash outflow to the government for taxes.
cash outflow to shareholders as dividends.
cash outflow to lenders as interest.
cash outflow to purchase bonds issued by another company.

3. If the following are balance sheet changes:

$5,005 decrease in accounts receivable
$7,000 decrease in cash
$12,012 decrease in notes payable
$10,001 increase in accounts payable
a "use" of funds would be the:
$7,000 decrease in cash.
$5,005 decrease in accounts receivable.
$10,001 increase in accounts payable.
$12,012 decrease in notes payable.

4. On an accounting statement of cash flows an "increase (decrease) in cash and cash

equivalents" appears as
a cash flow from operating activities.
a cash flow from investing activities.
a cash flow from financing activities.
none of the above. (It is the net result of all the operating,
investing, and financing cash inflows and outflows.)
5. Uses of funds include a (an):
decrease in cash.

increase in any liability.

increase in fixed assets.

tax refund.

6. Which of the following would be included in a cash budget?

depreciation charges.

dividends.

goodwill.

patent amortization.

7. An examination of the sources and uses of funds statement is part of:

a forecasting technique.
a funds flow analysis.
a ratio analysis.
calculations for preparing the balance sheet.

8. Which of the following is NOT a cash outflow for the firm?

depreciation.

dividends.

interest payments.

taxes.

9. Which of the following would be considered a use of funds?

a decrease in accounts receivable.

a decrease in cash.

an increase in account payable.

an increase in cash.
10. The cash flow statement in the United States is most likely to appear using
a "supplementary method."
a "direct method."
an "indirect method."
a "flow of funds method."

11. For a profitable firm, total sources of funds will always total uses of funds.
be equal to
be greater than
be less than
have no consistent relationship to
 CHAPTER - 4

OVERVIEW OF WORKING CAPITAL MANAGEMENT

1. In finance, "working capital" means the same thing as

total assets.

fixed assets.

current assets.

current assets minus current liabilities.

2. Which of the following would be consistent with a more aggressive approach to

financing working capital?
Financing short-term needs with short-term funds.

Financing permanent inventory buildup with long-term debt.

Financing seasonal needs with short-term funds.

Financing some long-term needs with short-term funds.

3. Which asset-liability combination would most likely result in the firm's having the
greatest risk of technical insolvency?
Increasing current assets while lowering current liabilities.
Increasing current assets while incurring more current liabilities.
Reducing current assets, increasing current liabilities, and reducing long-term

debt.
Replacing short-term debt with equity.

4. Which of the following illustrates the use of a hedging (or matching) approach to
financing?
Short-term assets financed with long-term liabilities.
Permanent working capital financed with long-term liabilities.
Short-term assets financed with equity.
 All assets financed with a 50 percent equity, 50 percent long-term debt
mixture.

5. In deciding the appropriate level of current assets for the firm, management is
confronted with
a trade-off between profitability and risk.
a trade-off between liquidity and marketability.
a trade-off between equity and debt.
a trade-off between short-term versus long-term borrowing.

6. varies inversely with profitability.

Liquidity.
Risk.
Blue.
False.

7. Spontaneous financing includes

accounts receivable.
accounts payable.
short-term loans.
a line of credit.

8. Permanent working capital

varies with seasonal needs.
includes fixed assets.
is the amount of current assets required to meet a firm's long-term minimum
needs.
includes accounts payable.

9. Financing a long-lived asset with short-term financing would be

an example of "moderate risk -- moderate (potential) profitability" asset
financing.
an example of "low risk -- low (potential) profitability" asset financing.
an example of "high risk -- high (potential) profitability" asset financing.
an example of the "hedging approach" to financing.
10. Net working capital refers to
total assets minus fixed assets.
current assets minus current liabilities.
current assets minus inventories.
current assets.
 CHAPTER - 5

CASH AND MARKETABLE SECURITIES MANAGEMENT

1. Marketable securities are primarily

short-term debt instruments.

short-term equity securities.

long-term debt instruments.

long-term equity securities.

2. Time consumed in clearing a check through the banking system.

Processing float
Deposit float
Collection float
Availability float

3. Commercial paper is essentially

another term for a junk bond.
a short-term unsecured corporate IOU.
an intermediate-term corporate bond.
a certificate that may be exchanged for a share of common stock at a
specified future
date.

4. Concentration banking
increases idle balances.
moves excess funds from a concentration bank to regional banks.
is less important during periods of rising interest rates.
improves control over corporate cash.
5. Which would be an appropriate investment for temporarily idle corporate cash that
will be used to pay quarterly dividends three months from now?
A long-term Aaa-rated corporate bond with a current annual yield of 9.4
percent.
A 30-year Treasury bond with a current annual yield of 8.7 percent.
Ninety-day commercial paper with a current annual yield of 6.2 percent.
Common stock that has been appreciating in price 8 percent annually, on
average, and paying a quarterly dividend that is the equivalent of a 5 percent
annual yield.

6. Which of the following marketable securities is the obligation of a commercial

bank?
Commercial paper
Negotiable certificate of deposit
Repurchase agreement
T-bills

7. The movement of business data electronically in a structured, computer-readable

format.
EFT
EDI
SWIFT
CHIPS

8. That portion of a firm's total marketable securities portfolio held to take care of
probable deficiencies in the firm's cash account.
Free cash segment
Controllable cash segment
Ready cash segment
None of the above
9. The most basic requirement for a firm's marketable securities.
Safety
Yield
Marketability
New York.

10. A non-negotiable check payable to a company account at a concentration bank

Payable through draft (PTD)
Depository transfer check (DTC)
ACH transfer
Repo

11. According to the Bond Equivalent Yield (BEY) method, the yield on a $1,000, 13-
week US Treasury bill purchased for $960 would be closest to .
16.0 percent
16.7 percent
17.0 percent
17.8 percent
 CHAPTER - 6

CAPITAL STRUCTURE DETERMINATION

1. The term "capital structure" refers to:

long-term debt, preferred stock, and common stock equity.
current assets and current liabilities.
total assets minus liabilities.
shareholders' equity.

2. A critical assumption of the net operating income (NOI) approach to valuation is:
that debt and equity levels remain unchanged.
that dividends increase at a constant rate.
that ko remains constant regardless of changes in leverage.
that interest expense and taxes are included in the calculation.

3. The traditional approach towards the valuation of a company assumes:

that the overall capitalization rate holds constant with changes in financial
leverage.
that there is an optimum capital structure.
that total risk is not altered by changes in the capital structure.
that markets are perfect.

4. Two firms that are virtually identical except for their capital structure are selling in
the market at different values. According to M&M
one will be at greater risk of bankruptcy.
the firm with greater financial leverage will have the higher value.
this proves that markets cannot be efficient.
this will not continue because arbitrage will eventually cause the firms to sell
at the same value.
5. The cost of monitoring management is considered to be a (an):
bankruptcy cost.
transaction cost.
agency cost.
institutional cost.

6. What is the value of the tax shield if the value of the firm is $5 million, its value if
unlevered would be $4.78 million, and the present value of bankruptcy and agency costs
is $360,000?
$140,000
$220,000
$360,000
$580,000

7. According to the concept of financial signaling, management behavior results in new

debt issues being regarded as " news" by investors.
good
bad
non-event
risk-neutral

8. The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency
costs --
remains constant with increasing levels of financial leverage.
first declines and then ultimately rises with increasing levels of financial
leverage.
increases with increasing levels of financial leverage.
decreases with increasing levels of financial leverage.

9. When sequential long-term financing is involved, the choice of debt or equity

influences the future financial of the firm.
timing
flexibility
liquidity
 CHAPTER - 7

THE CAPITAL MARKET

1. Letter stock is
a handwritten certificate representing a corporate IOU.
a mass mailing offering a security for sale.
securities issued by the United States Postal Service.
privately placed common stock that cannot be immediately resold to the
general public.

2. A preliminary prospectus is known as a

golden parachute.
red herring.
blue sky.
green shoe.

3. If an investment banker has agreed to sell a new issue of securities on a best-efforts

basis, the issue
most likely involves an unusually large stock offering.
most likely involves bonds instead of common stock.
results in no assumption of underwriting risk by the investment banker.
most likely involves a well-established, large company.

4. The actual market value of a right will differ from its theoretical value for all of the
following reasons EXCEPT for:
the size of the firm's marginal tax rate.
the amount of transactions costs incurred.
investor speculation.
the irregular exercise and sale of rights over the subscription period.

5. In a common stock rights offering the subscription price is generally:

set equal to the current market price of the stock.
set below the current market price of the stock.
 set above the current market price of the stock.
set after the stock goes "ex-rights."

6. When the investment banker bears the risk of not being able to sell a new security at
the established price, this is known as:
a best efforts offering.
underwriting.
shelf registration.
making a market.

7. To say that there is "asymmetric information" in the issuing of common stock or

debt means that
investors have nearly perfect information.
the markets have nearly perfect information.
investors have more accurate information than management has.
management has more accurate information than investors have.

8. In calculating the value of one right when the stock is selling "rights-on," the analyst
needs to know the number of rights needed to buy one share of stock and:
the subscription price per share.
the transactions costs involved.
the price-earnings ratio of the firm's stock.
the length of the rights offering period.

9. A best efforts offering is sometimes used in connection with a of new, long-

term securities.
private placement
privileged subscription
public issue
all of the above

10. permits what is known as a shelf registration.

SEC Rule 144
SEC Rule 144a
 SEC Rule 415
SEC Form 13D

11. A company can ensure the complete success of a rights offering by making use of a
standby arrangement.
oversubscription privilege.
green shoe provision.
shelf registration.

12. Financial intermediaries .

do not invest in new long-term securities
include insurance companies and pension funds
include the national and regional stock exchanges
are usually underwriting syndicates
 CHAPTER - 8

LONG-TERM DEBT, PREFERRED STOCK, AND COMMON STOCK

1. A bond issue may be retired by:

calling the bonds if there is a call feature.
converting the bonds (if convertible) into common stock.
making a single-sum payment at final maturity.
all of the above.

2. Protective covenants are:

to protect employees.
to protect the interests of the company.
to protect shareholders.
to protect bondholders.

3. Which of the following bonds offer the investor the most protection?
First-mortgage bonds
Debentures
Subordinated debentures
Income bonds

4. A company refunds its bonds for any of the following reasons EXCEPT for:
to eliminate restrictive covenants.
to reduce interest costs.
to show higher reported profits.
to issue new bonds at higher rate of interest.

5. The call-option value of a callable bond is likely to be high when

interest rates are volatile.
interest rates are low and expected to remain low.
interest rate are high and expected to remain high.
markets are inefficient.
6. Treasury stock is:
common stock issued by the U.S. government.
preferred stock issued by the U.S. government.
common stock that has been repurchased and is being held by the issuing
company.
a corporation's common stock outstanding.

7. A call provision, a sinking fund, and/or conversion are used to retire

bonds and preferred stock.
bonds and common stock.
preferred stock and common stock.
only common stock.

8. Preferred shareholders' claims on assets and income of a firm come those of

creditors those of common shareholders.
before; and also before
after; but before
after; and also after
equal to; and equal to

9. Dual classes of are common in new ventures where promotional usually

goes to the founders.
bonds; bonds
preferred stock; preferred stock
common stock; common stock
warrants; warrants
 CHAPTER - 9

TERM LOANS AND LEASES

1. One difference between a financial lease and operating lease is that:

there is a often a call option in a financial lease.
there is often an option to buy in an operating lease.
an operating lease is often cancellable by the lessee.
a financial lease is often cancellable by the lessee.

2. The principal reason for the existence of leasing is that:

intermediate-term loans are difficult to obtain.
this is a type of financing unaffected by changes in tax law.
companies, financial institutions, and individuals derive different benefits
from owning assets.
leasing is a renewable source of intermediate-term funds.

3. A way to analyze whether debt or lease financing would be preferable is to:

compare the net present values under each alternative, using the cost of
capital as the discount rate.
compare the net present values under each alternative, using the after-tax cost
of borrowing as the discount rate.
compare the payback periods for each alternative.
compare the effective interest costs involved for each alternative.

4. A conventional revolving credit agreement allows a firm:

to borrow a fixed amount for the entire commitment period.
to borrow for a short-period with a right to renew the loan during the
commitment period.
to possibly include a provision to convert the credit agreement into a term
loan contract at maturity.
to do all of the above.
5. The type of lease that includes a third party, a lender, is called a(n):
sale and leaseback.
direct leasing arrangement.
leveraged lease.
operating lease.

6. One advantage of a financial lease is that:

it has a shorter maturity than term loans.
it never appears as a liability on the balance sheet.
it eliminate the needs to make periodic payments.
it provides a way to indirectly depreciate land.

7. Medium-term notes (MTNs) have maturities that range up to

one year (but no more).
two years (but no more).

ten years (but no more).

thirty years (or more)

8. A direct lease, a sale and leaseback, and a leveraged lease are all examples of
operating leases.
financial leases.
full-service leases.
"off-balance sheet" methods of financing.
 CHAPTER - 10

INTERNATIONAL FINANCIAL MANAGEMENT

1. Which of the following is a legitimate reason for international investment?

Dividends from a foreign subsidiary are tax exempt in the United States.
Most governments do not tax foreign corporations.
There are possible benefits from international diversification.
International investments have less political risk than domestic investments.

2. Interest-rate parity refers to the concept that, where market imperfections are few,
the same goods must sell for the same price across countries.
interest rates across countries will eventually be the same.
there is an offsetting relationship between interest rate differentials and
differentials in the forward spot exchange market.
there is an offsetting relationship provided by costs and revenues in similar
market environments.

3. The forward market is especially well-suited to offer hedging protection against

translation risk exposure.
transactions risk exposure.
political risk exposure.
taxation.

4. Suppose that the Japanese yen is selling at a forward discount in the forward-
exchange market. This implies that most likely
this currency has low exchange-rate risk.
this currency is gaining strength in relation to the dollar.
interest rates are higher in Japan than in the United States.
interest rates are declining in Japan.
5. Following FASB Statement No. 52, gains or losses from currency translation are
shown:
on the income statement as currency gains (or losses).
on the balance sheet as an adjustment to owners' equity.
on the balance sheet as an adjustment to cash.
nowhere because gains or losses from currency changes need not be shown..

6. All of the following are hedges against exchange-rate risk EXCEPT

balancing monetary assets and liabilities.
use of spot market.
foreign-currency swaps.
adjustment of funds commitments between countries.

7. A multinational can centralize cash management and attempt to reduce exchange rate
risk exposure through the use of
a reinvoicing center.
a bill of lading.
a time draft.
countertrade.

8. Forfaiting most closely resembles

export factoring.
countertrade.
netting.
reinvoicing.

9. The euro is the name for

a currency deposited outside its country of origin.
a bond sold internationally outside of the country in whose currency
the bond is denominated.
a common European currency.
a type of sandwich.
10. Assume that a Big Mac hamburger is selling for £1.99 in the United Kingdom, the
same hamburger is selling for $2.71 in the United States, and the actual exchange rate (to
buy $1.00 with British pounds) is 0.63. According to , the British pound is the
US dollar.
purchasing-power parity; undervalued
interest-rate parity; undervalued
purchasing-power parity; overvalued
interest-rate parity; overvalued

*****************