Financial management concepts and applications by stephen foerster pdf

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Financial Management: Concepts and Applications

1st Edition, 2015

ISBN-13: 978-0-13-293664-4

Stephen Foerster

Pearson

06/16

BAM 513 Financial Management

All rights reserved. No part of this may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system without written permission, except for the inclusion of brief quotation in review.

Copyright © 2016 by California Coast University

5

Final Examination

BAM 513 Financial Management

Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

The creation of value is driven by what factors? 1.

cash flow and growtha. growth and riskb. profitability and growthc. reducing risk d.

The cash flow cycle: 2.

describes the flow of cash through a company.a. illustrates that profits and cash flows are the same.b. reminds a financial manager that profits are important.c. focuses on financing activities only. d.

Which of the following goals are in the best long-term interest of shareholders? 3.

profit maximizationa. risk minimizationb. maximizing the market value of the existing shareholders’ common stockc. maximizing sales revenue d.

Operating activities are concerned with ______. 4.

determining whether a company’s assets should be financed with debt or equitya. managing a firm’s cash budgeting proceduresb. managing a firm’s working capitalc. planning sales of a corporation’s equity capital d.

Ensuring that there is adequate cash to pay the firm’s suppliers is an example of which 5. cash-related activity in the cash flow cycle?

operating activitya. profitability activityb. investing activityc. financing activity d.

Offering discounts to accelerate the collection of accounts receivables in an example of which 6. cash-related activity in the cash flow cycle?

operating activitya. profitability activityb. investing activityc. financing activityd.

6

Final Examination

BAM 513 Financial Management

In general, financial managers are concerned with which of the following? 7.

creating economic wealtha. making investment decisions that optimize economic valueb. making business decisions that optimize economic wealthc. all of the above d.

A corporate financial manager who is trying to create value for its shareholders ______. 8.

is not concerned with ethics but rather with writing iron-clad contractsa. can safely ignore ethics as long as no laws are brokenb. must behave ethically to stay out of jailc. is concerned with ethics because unethical behavior destroys trust, and businesses d. cannot function without a certain degree of trust

The ability to analyze the company’s strengths and weaknesses is a fundamental concept that 9. a nonfinancial manager should understand in order to ______.

better assess the current environment in which the firm operatesa. better assess future financing requirementsb. better understand the role of capital markets in raising long-term fundsc. better measure and create value for the shareholder d.

Although the firm has many important stakeholders, the ________ are most important 10. because they are essentially the owners of the firm.

shareholdersa. investment bankersb. lendersc. managers d.

Which of the following statements is/are advantages of incorporation? 11.

access to capital marketsa. limited liabilityb. unlimited lifec. all of the aboved.

7

Final Examination

BAM 513 Financial Management

A comprehensive nonfinancial size-up should be done ______. 12.

monthlya. quarterlyb. annuallyc. as needed d.

Information for the sizing-up process for publicly traded firms can be obtained from ______. 13.

the firm’s annual reporta. the firm’s 10-K report filed with the Securities & Exchange Commissionb. industry reportsc. all of the above d.

The economic size-up involves ______. 14.

the relationship between overall economic activity and the industry’s performance a. assessment of the economy identifying the current business cycle stageb. anticipation of the interest rate changec. all of the above d.

When a country imports more than it exports, it will ______. 15.

be known as a net importing country and this portion of the GDP will have positive valuea. be known as a net importing country and this portion of its GDP will have a negative b. value be known as a net exporting country and this portion of its GDP will have a positive valuec. be known as a net exporting country and this portion of its GDP will have a negative d. value

Capital market conditions can affect the timing of a new equity issue because ______. 16.

issuing new equity may be harder when stock prices are risinga. issuing new equity may be easier when stock prices are risingb. issuing new equity may be harder when stock prices are fallingc. b and cd.

8

Final Examination

BAM 513 Financial Management

Which of the following is NOT considered to be a factor that affects the industry in which a 17. firm operates?

technologya. credit conditionsb. interest ratesc. regulations d.

All of the political factors can give managers further insights into the opportunities and risks 18. facing a particular industry EXCEPT:

favorable tax changes or incentives in the industrya. pending and new government relationsb. nature and intensity of competitionc. demographic changes in the population d.

All operating systems involved what is known as the Six P’s of Operations, which include 19. ______.

product quality, profitability, and peoplea. process, plant, and profitabilityb. product quality, process, and peoplec. product potential, plant, and partners d.

A firm is considering whether to outsource some aspects of the manufacturing of its 20. products. Which one of the Six P’s of Operations is the firm addressing?

product qualitya. processb. plantc. people d.

Sizing-up marketing management involves ______. 21.

identifying the firm’s strengths and weaknesses related to marketinga. identifying the target marketb. identifying the appropriate marketing mixc. all of the aboved.

9

Final Examination

BAM 513 Financial Management

Marketing analysis involves all of the following EXCEPT: 22.

distinguishing between who buys the product and who consumes ita. determining the channel through which the product or service is purchasedb. assessing the firm’s plant capacitiesc. determining the unique features of the target market d.

Management seeks to identify individuals who possess capability in these four areas: 23.

business intelligence, marketing intelligence, strategic intelligence, and people a. intelligence business intelligence, organizational intelligence, strategic intelligence, and people b. intelligence business intelligence, marketing intelligence, organizational intelligence, and people c. intelligence business intelligence, emotional intelligence, strategic intelligence, and people d. intelligence.

Which of the following describes a balance sheet? 24.

Reports cash receipts and cash disbursements for a specific accounting period.a. Reports the amount and composition of assets and liabilities at a specific accounting b. period. Reports the value of a firm’s assets, liabilities, and net worth at a particular point in c. time. Reports revenues and expenses for a specific accounting period. d.

Which of the following is NOT considered a fixed asset? 25.

landa. equipmentb. buildingsc. patents d.

Which of the following balance sheet equations is NOT CORRECT? 26.

assets - current liabilities = long-term liabilitiesa. assets - liabilities = shareholders’ equityb. assets = liabilities + shareholders’ equityc. assets - current liabilities = long-term liabilities + shareholders’ equityd.

10

Final Examination

BAM 513 Financial Management

Who owns the retained earnings of a public firm? 27.

common stockholdersa. bondholdersb. managementc. the IRS d.

Stock that is repurchased by the issuing company is called ______. 28.

paid in capitala. retained capitalb. treasury stockc. par value stock d.

Which is NOT an example of current liabilities? 29.

notes payablea. accounts receivableb. current portion of long-term debtc. taxes payable d.

The statement of financial performance is known as the ______. 30.

statement of cash flowsa. statement of stockholders’ equityb. balance sheetc. income statement d.

Cost of sales is calculated by ______. 31.

adding the cost of inventory on hand at the start of the period minus the cost of any a. purchases of materials during the year and then subtract the cost of ending inventory adding the cost of the inventory at the start of the period plus the cost of any purchases b. of materials during the year and then subtract the cost of the ending inventory adding the cost of the inventory on hand at the start of the period plus the cost of any c. purchases of materials during the year and then add the cost of the ending inventory adding the cost of the inventory on hand at the end of the period plus the cost of any d. purchases of materials during the year and then subtract the costs of the beginning inventory

11

Final Examination

BAM 513 Financial Management

The firm’s revenues and expenses over a period of time are reported on the firm’s ______. 32.

income statement or statement of financial positiona. income statement or statement of financial performanceb. balance sheet or statement of financial performancec. balance sheet or statement of financial position d.

Which of the following does NOT represent cash outflows to the firm? 33.

taxesa. interest paymentsb. dividendsc. depreciation d.

Which of the following represents a source of cash? 34.

a decrease in accounts payablea. a decrease in accounts receivableb. payment of dividendsc. an increase in inventories d.

Which of the following is NOT a source of cash from financing activities? 35.

repayment of long-term debta. proceeds from issuance of common stockb. proceeds for long-term borrowingc. both a and c d.

Time series ratio analysis of your own firm over time is an example of:36.

external assessmenta. narcissistic assessmentb. cross sectional assessmentc. internal assessment d.

Modern Comics Inc., has sales of $2,500,000, net income of $50,000, assets worth 37. $1,700,000, and total common stockholder equity of $1,500,000. The ROE for the firm is ______.

68.00%a. 60.00%b. 2.94%c. 3.33%d.

12

Final Examination

BAM 513 Financial Management

The firm’s ________ indicates the degree to which effective use of borrowing contributed to 38. the firm’s ROE.

asset turnovera. financial leverageb. profit marginc. return on assets d.

A firm’s age of accounts receivable ______. 39.

measures the average time between credit-based sales and the collection of payments for a. those sales is likely to be greater for firms within the same industry with more generous credit termsb. is in part a function of the type of industry in which the firm operatesc. all of the above d.

The ________ ratio measures the extent to which a firm is able to cover its short-term 40. obligations (usually defined as obligations due within the next year) with its short-term assets.

ROEa. currentb. inventory turnoverc. working capital d.

The simple accounting equation may be written as ______. 41.

liabilities = assets + equitya. assets = liabilities + equityb. equity = liabilities + assetsc. assets = liabilities - equity d.

Which of the following is NOT a potential source of cash for a firm? 42.

repayment of a short-term loana. an increase in equityb. an increase in long-term debtc. a decrease in property, plant, or equipmentd.

13

Final Examination

BAM 513 Financial Management

Which of the following is an example of a type of inventory management activity? 43.

JIT or just-in-time inventory control systema. RFI or radio frequency identification systemsb. EOQ or economic order quantity formulasc. all of the above d.

Which of the following trade credit terms for goods and services purchased would be 44. preferred by a firm?

2/10 net 30a. 3/10 net 45b. 3/15 net 45c. Unless we know the firm’s cost of borrowing we cannot determine which set of terms is d. preferred.

When constructing pro forma income statements which of the following is the last item to be 45. estimated?

salesa. the change in retained earningsb. depreciation expensec. taxes d.

Cantanna Inc., is developing a pro forma income statement for the coming year. The chief 46. financial officer estimates that fixed assets are $70,000,000 and that sales will be $300,000,000. If depreciation is historically 20% of fixed assets, what is the expected amount of depreciation for the upcoming year (in dollars)?

$14,000,000a. $20,000,000b. $60,000,000c. this figure cannot be reasonably estimated d.

When developing a pro forma balance sheet which of the following is typically the LAST item 47. to be estimated?

inventorya. total assetsb. external financingc. cashd.

14

Final Examination

BAM 513 Financial Management

The ________ is the critical connection between the pro forma income statement and the pro 48. forma balance sheet.

change in net working capitala. change in cost of goods soldb. change in dividendsc. change in retained earnings d.

Managers often begin with an estimate of ________ when beginning to develop pro forma 49. financial statements.

net incomea. salesb. assetsc. equity d.

Dynamo Engines Inc., has an ROA of 10%, a profit margin of 6%, an assets to equity ratio of 50. 1.30, and a retention ratio of 0.70. What is the firm’s sustainable growth rate?

18.57%a. 9.10%b. 5.46%c. 0.55% d.

The ________ is a two-edged sword in that as its value increases the ROE should increase, 51. but the risk to shareholders also increases.

profit margina. ROAb. leverage ratioc. asset turnover ratio d.

Consider the equation for present value. If you wished to increase the present value of a 52. future amount by changing only one variable, which of the following actions should you take?

increase the time perioda. decrease the future valueb. decrease the interest ratec. this statement cannot be answered with the information providedd.

15

Final Examination

BAM 513 Financial Management

Which choice has a greater present value if we assume a required rate of return of 10%? 53. 1: A lump sum cash flow today of $248.69 2: $100 cash flows occurring one, two, and three years from today 3: a single cash flow of $331 three years from today.

Choice 1a. Choice 2b. Choice 3c. The choices all have equal present values at a discount rate of 10%. d.

Your parents paid $1,000 for a college fund bond when you were born. Today is your 20th 54. birthday and you are ready to cash the bond which has grown to a value of $3,361.85. What was the average annual rate of return on your college fund bond?

5.50%a. 6.25%b. 6.73%c. there is not enough information to answer this question d.

Michael received a professional baseball contract paying $7,000,000 per year for 5 years, 55. Bert received a two-year contract for $16,000,000 per year. For purposes of calculations, treat these contracts as ordinary annuities. Who’s contract has a greater present value if we assume a discount rate of 6%?

Bert = $29,334,283a. Michael = $29,486,547b. Bert = $39,459651c. Michael = $39, 743,196 d.

Your university is running a special offer on tuition. This year’s tuition cost is $18,000. Next 56. year’s tuition cost is scheduled to be $19,080. The university offers to discount next year’s tuition at a rate of 6% if you agree to pay both year’s tuition in full today. How much is the total tuition bill today if you take the offer?

$34,981.13a. $36,000.00b. $37,080.00c. $38,160.00d.

16

Final Examination

BAM 513 Financial Management

Which of the following could be considered a form of perpetuity? 57.

the college tuition payments that students make for four years.a. a 20-year corporate bondb. a university scholarship endowment that promises to pay out $10,000 per year for an c. indefinite time period a contract from the winning lottery ticket to receive cash flows for the next 30 years d.

The interest rate used to discount bond cash flows to determine the bond price is known as 58. the ______.

coupon ratea. yield to maturityb. compound ratec. coupon yield d.

Zero coupon bonds have which of the following features? 59.

annual interest paymentsa. semi-annual interest paymentsb. no interest paymentsc. any of the above may apply d.

The ________ is used to determine the annual or semi-annual interest cash flow for a bond 60. whereas the ________ is the rate used to determine the price of the bond.

coupon rate; yield to maturitya. yield to maturity; coupon rateb. yield to maturity; discount ratec. current yield; yield to maturity d.

Most bonds issued in the United States have ________ coupon payments and ________ face 61. values.

annual; $1,000a. annual; $500b. semi-annual; $1,000c. semi-annual; $500d.

17

Final Examination

BAM 513 Financial Management

After a bond issue if the yield to maturity increases a conventional bond will see the price 62. ______.

increasea. decreaseb. stay the samec. there is not enough information to answer this question d.

Firms attempt to price bonds so that at issue they sell for the ______. 63.

face valuea. coupon valueb. firm valuec. the same price as shares of preferred stock d.

The maturity of an issue of preferred stock is ______. 64.

the same as the longest maturity bond issued by the firma. variable between 15 and 30 yearsb. indefinite, just as the maturity of common sharesc. renewable every five years d.

Suppose a preferred share pays perpetual QUARTERLY dividends of $0.25 and has a per 65. annum dividend yield of 6 percent. What is the fair value of this preferred share?

$14.67a. $15.33b. $16.00c. $16.67 d.

The ________ method is the most intuitive but least sophisticated capital budgeting 66. technique presented by the author.

net present valuea. internal rate of returnb. paybackc. modified internal rate of returnd.

18

Final Examination

BAM 513 Financial Management

The ________ method of capital budgeting finds the present value of cash inflows and 67. subtracts the initial cash outflow.

paybacka. net present valueb. internal rate of returnc. modified internal rate of return d.

The decision rule for net present value declares that a project is acceptable if ______. 68.

it pays back within a specified time period.a. the rate of return is greater than the firm’s cost of capital.b. the present value of the cash inflows exceeds the initial cash outflow.c. all of the statements above are true d.

A firm’s cost of capital may also be known as ______. 69.

the cost of financinga. the internal rate of returnb. modified internal rate of returnc. the prime rate d.

The IRR method of capital budgeting tells us what particular discount rate will result in a 70. ________ NPV project.

positivea. negativeb. zeroc. none of the above d.

The decision rule for the profitability index is that any project with ________ is an acceptable 71. project.

a ratio less than onea. a ratio greater than oneb. a ratio greater than zeroc. a ratio less than zerod.

19

Final Examination

BAM 513 Financial Management

Typically, the rate of return on ________ exceeds the rate of return on ________. 72.

long-term bonds; short-term bondsa. government bonds; similar maturity corporate bondsb. short-term bonds; long-term bondsc. marketable securities; common stock d.

With ________ bonds a firm can choose to pay back the investor at a pre-specified date prior 73. to the maturity date, usually at a pre-specified price above the face value, representing a premium to the bondholder.

callablea. convertibleb. variable rate c. premium d.

________ place some restrictions on the firm in such a way as to improve the odds that the 74. bondholders will be repaid.

Bond ratingsa. Bond covenantsb. Bond rating agenciesc. Bond exchanges d.

Which of the following have payments that are tax deductible for the corporation? 75.

bond interest paymentsa. preferred dividendsb. common dividendsc. retained earnings d.

If a firm does not have publicly traded debt and therefore does not have a yield to maturity 76. as an estimate for its cost of debt, a common practice is to estimate the cost of debt by adding a premium to the rate on:

the cost of accounts payable.a. equity.b. long-term government bonds.c. collateralized debt obligations.d.

20

Final Examination

BAM 513 Financial Management

The market risk premium represents the expected difference between ______. 77.

the return on AAA bonds and Treasury bondsa. the prime rate and the 3-month Treasury bill rateb. the return on the stock market and the return on preferred sharesc. the return on the stock market investment and the risk-free return d.

All else equal, investors “like” ________ and “dislike” ________. 78.

risk; returna. return; riskb. standard deviation; riskc. diversification; return d.

What is the WACC for Bacon Signs Inc, if the after-tax cost of long-term debt is 6.3% and 79. the before tax cost of equity is 10.4%?

8.02%a. 8.91%b. 9.58%c. Without a corporate tax rate, we cannot answer this question as written. d.

For a project to be accepted, the ________ may be greater than or less than the firm’s WACC, 80. but the ________ must be greater than the hurdle rate.

IRR; NPVa. hurdle rate; IRRb. MIRR; NPVc. NPV; IRR d.

The risk that can be eliminated through the practice of diversification is known as ________ 81. risk.

unsystematic a. systematicb. nondiversifiablec. speculative d.

A firm’s risk level will fluctuate as its ________ changes. 82.

financial leveragea. debt-to-equityb. degree of financial leveragec. all of the aboved.

21

Final Examination

BAM 513 Financial Management

Modigliani-Miller (M-M) Proposition II states ______. 83.

the cost of equity does not change when a firm takes on a greater proportion of debta. the cost of equity increases when a firm takes on a greater proportion of debtb. the cost of debt increases when a firm takes on a greater proportion of equityc. the cost of equity decreases when a firm takes on a greater proportion of debt d.

The major real-world benefit of debt is that interest payments are ______. 84.

made after tax considerationsa. a tax-deductible expenseb. always less than 10% of the firm’s profitc. smaller than the dividend payments d.

Due primarily to concerns about financial distress, we tend to see very few firms financed 85. with ________ or more of their capital structure as debt.

20%a. 35%b. 55%c. 70% d.

Which type of firm is likely to have a high dividend payout ratio policy? 86.

a younger firm with uncertain income but significant growth opportunitiesa. an older firm with steady earnings but few growth opportunitiesb. an older firm with irregular income and significant growth opportunitiesc. a younger firm with significant income and super normal positive growth opportunities. d.

If a firm were simply concerned with minimizing costs of incremental financing, then the 87. straightforward choice would be ______.

debta. new equityb. retained earningsc. half debt and half equity financing d.

Financial managers should consider taking ________ financial risk when operating risk is 88. high, but may consider taking ________ financial risk when operating risk is low.

less; lessa. less; moreb. more; morec. more; lessd.

22

Final Examination

BAM 513 Financial Management

Which of the following lessons from the Great Recession is NOT true? 89.

The financial crisis really drove home the point that capital structure DOES matter in a. that firms with too much debt suffered greatly. Firms that relied too much on short-term financing were severely affected by the global b. liquidity crisis. Capital markets are indeed almost perfect.c. All of the above are true. d.

If a viable firm is not growing but is expected to continue over time, then we would expect 90. capital expenditures to be equal to ______.

salesa. depreciationb. EBITc. taxes payable d.

Legacy Industries Inc. has a historic P/E multiple of 15, a current EPS of $2.50 projected to 91. grow by 4% in the coming year, and a forward looking P/E multiple of 18. With this information please estimate the current price of the firm’s stock.

$37.50a. $46.80b. $39.00c. $48.20 d.

All else equal, the forward-looking price-earnings multiple is ________ related to risk and 92. ________ related to growth.

indirectly; directlya. indirectly; indirectlyb. directly; directlyc. directly; indirectly d.

Target firms in a merger or acquisition process realize, on average ______. 93.

significantly positive per share price premiumsa. significantly negative per share price reductionsb. no significant change in pricec. The return rate is unknown. This is an unanswered research question.d.

23

Final Examination

BAM 513 Financial Management

Generally, an economic SWOT analysis will move in this direction: 94.

the industry outlook to the broad economy to firm specific information and finally a. individual store sales. the broad economy to the industry outlook to firm specific information and finally b. individual store sales. the industry outlook to the broad economy to individual store sales and finally to firm c. specific information. the broad economy to the industry outlook to individual store sales and finally to firm d. specific information.

According to chapter 14, we can anticipate that any long-term growth in retail revenue will 95. tend to occur _________ growth in the overall economy, and the Internet retail revenue is expected to grow _________ the overall economy.

more rapidly than; less rapidly thana. less rapidly than; at the same rate asb. at a similar rate as; at a higher rate thanc. more rapidly than; at a similar rate as d.

Financial theory suggests and empirical evidence supports the idea that firms have a”pecking 96. order” by which they choose to raise funds to finance assets. From the first source of financing to the last this pecking order is ______.

internally generated funds, debt, and new equitya. debt, internally generated funds, and equityb. equity, debt, and internally generated fundsc. None of the above, there is no such preference d.

________ is a period measure that attempts to capture a firm’s ability to add value for 97. shareholders, after accounting for the requirements of other stakeholders.

Economic value addeda. Discounted cash flow analysisb. Price-earnings measurec. all of the above d.

The ________ is cited by the author as a reason for using just one rate, a long-term yield, as 98. the average cost of debt financing for a firm that has multiple issues of debt with varying maturities.

efficient markets hypothesis a. market substitution theoryb. biased expectation theoryc. unbiased expectations theoryd.

24

Final Examination

BAM 513 Financial Management

Which of the following is NOT a key component of the CAPM? 99.

betaa. diversifiable riskb. the risk-free ratec. the market risk premium d.

A firm with a beta of 2.0 should ______. 100.

be forced to stop trading until the market perceives less riska. require twice the return on the market portfoliob. require twice the market risk premiumc. require twice the risk-free rate of returnd.