Sample exam one Flashcards
Which of the following is LEAST likely to fall within the scope of financial management
(A) Assessing the risk of a proposed new project
(B) Determining whether to sell bonds or shares to raise new capital
(C) Financial reporting
(D) Reviewing the management of receivables
(C) Financial reporting
Which of the following are arguments for a company’s shares to be traded on a stock exchange?
1 Liquidity for shareholders lowers the cost of capital
2 Discipline on managers to perform
3 Quarterly reporting encourages short-term thinking
(A) 1, 2 and 3
(B) 1 and 3 only
(C) 2 and 3 only
(D) 1 and 2 only
(D) 1 and 2 only
Which of the following statements about equity finance are true?
1 Equity investors expect the greatest return because they bear the highest level of risk
2 In the event of company liquidation, shareholders rank above unsecured creditors for the distribution of assets
3 Preference dividends are more tax efficient than ordinary dividends
(A) 1 only
(B) 3 only
(C) 2 and 3 only
(D) 1 and 2 only
(A) 1 only
Which of the following statements about NPV and IRR are true?
1 IRR does not take into account the time value of money
2 IRR calculations assume that interim cash flows are reinvested in projects with the same rate of return
3 NPV shows the effect of a project on shareholder wealth
4 When capital is rationed, NPV and IRR give the same ranking of projects
(A) 1 and 2 only
(B) 2 and 3 only
(C) 3 and 4 only
(D) 1 and 4 only
(B) 2 and 3 only
Which of the following is the correct ‘pecking order’ for financing, with the most preferred option first?
(A) Borrowing; internal funds, new equity
(B) New equity; borrowing; internal funds
(C) Internal funds; borrowing; new equity
(D) Internal funds; new equity; borrowing
(C) Internal funds; borrowing; new equity
Which of the following is/are true following a share buy-back, compared with the situation after payment of a cash dividend of the same value? After a share buy-back:
1 The share price is higher
2 Earnings per share (EPS) is higher
3 Capital gearing is higher
(A) 2 only
(B) 1 and 2 only
(C) 1 and 3 only
(D) 1, 2 and 3
(D) 1, 2 and 3
Which of the following are possible reasons why mergers and takeovers tend to occur in waves?
1 Private investors become more cautious as stock markets rise in value
2 Rising share prices in a bull market make it easier to use shares to finance takeovers
3 Access to debt finance becomes easier in the late stages of an economic cycle
(A) 1 and 2 only
(B) 1 and 3 only
(C) 2 and 3 only
(D) 1 only
(C) 2 and 3 only
Which of the following represent financial benefits that may accrue to shareholders as a result of a takeover?
1 A decrease in the cost of capital
2 The company acquired is overvalued
3 There is an increase in earnings per share
(A) 1 and 2 only
(B) 1 and 3 only
(C) 2 only
(D) 3 only
(B) 1 and 3 only
You are asked to calculate the present value of an amount of money to be received in the future. Which three of the following factors would you consider?
Select one or more:
A. Risk
B. Pure time value
C. Net present value
D. Inflation
A, C, D
Which one of the following accurately describes ‘risk’?
A. The fact that the value of money changes over time.
B. The possibility that actual return may differ from the expected return.
C. The financial rewards gained as a result of making an investment.
D. The possibility that actual return may be less than the expected return.
B
The financial manager’s main emphasis is the use of:-
A. cash flow.
B. accrued earnings.
C. profit incentives.
D. organisation charts.
A
Which of the following are essential aspects of a financial managers knowledge?
Select one:
A. Investment appraisal methods
B. Financial markets
C. Cash and risk management
D. All of the above
D
Which three of the following are reasons why a firm should maximise shareholder wealth?
A. The shareholders own the firm.
B. It counters the tendency for management to pursue goals for their own benefit.
C. This approach encourages high levels of motivation in managers.
D. To survive in a competitive world.
A, B, D
Which one of the following options best describes the principal-agent problem?
A. When there is a breakdown of communication between shareholders and brokers.
B. When the shareholders have to incur the expense of ensuring that managers act in the interest of the shareholders.
C. When stockbrokers fail to collect principal payments on a financial security on behalf of the owner.
D. When brokers ask for additional payments to carry out a transaction.
B
Which three of the following are most likely to be solutions to the principal-agent problem?
A. Selling shares and the takeover threat.
B. Link managerial rewards to shareholder wealth improvement.
C. Corporate governance regulation.
D. Increasing management pay levels.
A, B, C
