Managerial finance involves making financial decisions that are critical to the success of an organization. These decisions revolve around managing funds, assets, and investments to achieve the company’s goals and maximize its value. In this dynamic field, professionals are often confronted with a myriad of questions related to financial management. To help you navigate this complex landscape, we’ve compiled the top 10 managerial finance questions along with concise answers, offering valuable insights into key financial concepts, strategies, and practices. Whether you’re a student looking to ace your finance exam or a finance professional seeking to sharpen your knowledge, these questions and answers will serve as a valuable resource to enhance your understanding of managerial finance.
Now, let’s move on to the Top 10 Managerial Finance Questions With Answers
Q1. Which of the following statements is CORRECT? Assume that the project being
considered has normal cash flows, with one outflow followed by a series of inflows.
a. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
b. If a project has normal cash flows and its IRR exceeds its cost of capital, then the project’s NPV must be positive.
c. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital.
d. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
e. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
Q2. Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%. This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
a. -651.16
b. -534.38
c. -562.50
d. -590.63
e. -620.16
Q3. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following
statements is CORRECT?
a.The periodic interest rate is greater than 3%.
b.The present value would be greater if the lump sum were discounted back for more periods.
c.The periodic rate is less than 3%.
d.The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
e.The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
Q4. You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?
a. $20,251
b. $21,264
c. $18,369
d. $19,287
e. $22,327
Q5. An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
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The price of the stock is $40.
∙
The strike price of the option is $40.
∙
The option matures in 3 months (t = 0.25).
∙
The standard deviation of the stock’s returns is 0.40, and the variance is 0.16.
∙
The risk-free rate is 6%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
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d1 = 0.175
∙
d2 = −0.025
∙
N(d1) = 0.56946 ∙
N(d2) = 0.49003
N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?
a. $2.81
b. $3.82
c. $3.12
d. $4.20
e. $3.47
Q6. Company A has a beta of 0.70, while Company B’s beta is 1.20. The required return
on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference
between A’s and B’s required rates of return? (Hint: First find the market risk
premium, then find the required returns on the stocks.)
a. 3.21%
b. 2.89%
c. 3.38%
d. 2.75%
e. 3.05%
Q7. The LeMond Corporation just purchased a new production line. Assume that the
firm planned to depreciate the equipment over 5 years on a straight-line basis, but
Congress then passed a provision that requires the company to depreciate the
equipment on a straight-line basis over 7 years. Other things held constant, which of
the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting
purposes.
a. LeMond’s cash position will improve (increase).
b. LeMond’s net fixed assets as shown on the balance sheet will be higher at the end of the year.
c. LeMond’s reported net income after taxes for the year will be lower.
d. LeMond’s tax liability for the year will be lower.
e. LeMond’s taxable income will be lower.
Q8. Which of the following statements is CORRECT? Assume that the project being
considered has normal cash flows, with one outflow followed by a series of inflows.
a. One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
b. The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.
c. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long- lived projects, and this will cause its risk to increase over time.
d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
e. If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.
Q9. Which of the following bank accounts has the highest effective annual return?
a. An account that pays 8% nominal interest with monthly compounding.
b. An account that pays 7% nominal interest with monthly compounding.
c. An account that pays 8% nominal interest with annual compounding.
d. An account that pays 8% nominal interest with daily (365-day) compounding.
e. An account that pays 7% nominal interest with daily (365-day) compounding.
Q10. Stock A’s stock has a beta of 1.30, and its required return is 12.00%. Stock B’s beta is
0.80. If the risk-free rate is 4.75%, what is the required rate of return on B’s stock?
(Hint: First find the market risk premium.)
a. 8.76%
b. 9.68%
c. 8.98%
d. 9.21%
e. 9.44%
Answers
- b
- c
- e
- c
- e
- c
- b
- a
- d
- d