COR JESU COLLEGE,INC

Sacred Heart Avenue, Digos City

College of Accountancy, Business and
Entrepreneurship

FINANCIAL MANAGEMENT 1
Final Examination

Name:__________________________________________________________Score:______

TEST I. TRUE OR FALSE

Direction: Write TRUE if the statement is correct and FALSE if it is wrong on the space
provided before each number. One(1) Point each.

1. In most corporations, the CFO ranks under the CEO.

2. The Chairman of the Board must also be the CEO.
3. There are many types of unethical business behavior. One example is where executives
provide information that they know is incorrect to banks and to stockholders. It is illegal to
provide such information to banks, but it is not illegal to provide it to stockholders because
they are the owners of the firm, not outsiders.
4. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios
provide fast and easy-to-use estimates of a firm's liquidity position.
5. In order to maximize its shareholders' value, a firm's management must attempt to maximize
the stock price in the long run, or the stock's “intrinsic value.”
6. It is generally harder to transfer one’s ownership interest in a partnership than in a
corporation.
7. Equilibrium is the situation where the actual market price is equal to intrinsic value, so
investors are indifferent between buying or selling a stock.

8. A financial intermediary is a corporation that takes funds from investors and then provides
those funds to those who need capital.
9. Primary markets are large and important, while secondary markets are smaller and less
important.
10. In a well-functioning economy, capital will flow efficiently from those who supply capital to
those who demand it
11. A money market transaction occurs in the financial market in which funds are borrowed or
loaned for short periods (less than one year).
12. A publicly owned corporation is a company whose shares are held by the investing public,
which may include other corporations as well as institutional investors.
13. Starting to invest early for retirement increases the benefits of compound interest.
14. A time line is meaningful even if all cash flows do not occur annually.
15. It is better to start investing early.
16. Time lines cannot be constructed for annuities unless all the payments occur at the end of
the periods.
17. If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective
annual rate.
18. The four most fundamental factors that affect the cost of money are (1) production
opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.
19. All financial institutions are bank.
20. The higher the risk, the higher the security's required return, other things held constant.
21. The higher the time preference, the lower the cost of money, other things held constant.
22. Risk-averse investors require higher rates of return on investments whose returns are highly
uncertain, and most investors are risk averse.
23. Successful investing is about managing risk, not avoiding it.
24. The correct equation in personal investment is Income-Expense=Savings and Investment.
25. Overall increase in prices of goods and services is called inflation.
26. Risks should not be considered in making investment decisions.
27. Finance people have limited role in the economy.
28. The present value of a cash flow decreases as it moves further into the future.
29. Projects with shorter payback periods are always more profitable than project with longer
payback periods.
30. An increase in the discount rate will reduce the present value of future cash flows.

TEST II. MULTIPLE CHOICE

Direction: Write the letter of the correct answer on the answer sheet. Numbers with
computations are worth 2 Points.

1. Which of the following statements is CORRECT?

a. Corporations of all types are subject to less regulations.
b. Proprietorships are subject to more regulations than corporations.
c. In any partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Proprietorships and partnerships generally have a tax advantage over corporations.

2. Which of the following could explain why a business might choose to operate as a
corporation rather than as a proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporate shareholders are exposed to unlimited liability, but this factor is offset by
the tax advantages of incorporation.
c. Corporate investors are exposed to unlimited liability.
d. Corporations generally find it easier to raise large amounts of capital.

3. Which of the following statements is CORRECT?

a. Corporations are taxed more favorably than proprietorships.
b. Corporations have unlimited liability.
c. Because of their size, large corporations face fewer regulations than smaller
corporations and proprietorships.
d. Bond covenants are designed to protect bondholders and to reduce potential
conflicts between stockholders and bondholders.

4. The primary operating goal of a publicly-owned firm interested in serving its stockholders
should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s intrinsic
value.

5. A business created as a distinct legal entity composed of one or more individuals or entities
is called a(n):
a. Corporation.
b. Sole proprietorship.
c. Partnership.
d. Closed receivership.

6. The following are the primary tasks of the CFO EXCEPT:

a. To make sure that the accounting system provides “good” numbers for internal
decisions and to investors,
b. To ensure that the firm hire the right person for the job.
 c. To evaluate the operating units to make sure they are performing in an optimal
manner, and
d. To evaluate all proposed capital expenditures to make sure that they will increase
the firm’s value.

7.Which of the following is an example of a capital market instrument?

a. Commercial paper.
b. Preferred stock.
c. U.S. Treasury bills.
d. Banker's acceptances.

8. Money markets are markets for

a. Consumer automobile loans.
b. Common stocks.
c. Long-term bonds.
d. Short-term debt securities such as Treasury bills and commercial paper.

9. Equity securities have a ____ expected return than most long-term debt securities, and
they exhibit a____ degree of risk.
a. higher; higher c. lower; higher
b. lower; lower d. higher; lower

10.Those financial markets that facilitate the flow of short-term funds are known as
a. money markets. c. .primary markets.
b. capital markets. d. secondary markets

11.You recently sold 200 shares of Disney stock, and the transfer was made through a
broker. This is an example of:
a. A money market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. An over-the-counter market transaction.

12.Which of the following would indicate an improvement in a company’s financial position,

holding other things constant?
a. The inventory and total assets turnover ratios both decline.
b. The debt ratio increases.
c. The times-interest-earned ratio declines.
d. The current and quick ratios both increase.

13.Jose now has P1000. How much would he have after 6 years if he leaves it invested at
5.5% with annual compounding?
a. P1,182.18 c. P1,309.90
b. P1,244.40 d. P1,378.84

14.Suppose you have P4,000 and plan to purchase a 10-year certificate of deposit (CD) that
pays 6.5% interest, compounded annually. How much will you have when the CD
matures?
a. P7,508.54 c. P8,278.18
b. P7,883.98 d. P8,692.08

15.Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest
rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?
a. P1,928.78 c. P2,131.81
b. P2,030.30 d. P2,238.40
16.What is the PV of an ordinary annuity with 10 payments of P2,700 if the appropriate
interest rate is 5.5%?
a. P16,576 c. P18,367
b. P17,449 d. P20,352

17.Bank A offers loans at an 8% nominal rate but requires that interest be paid quarterly.
What is its effective annual rate?
a. 8.24% c. 8.00%
b. 8.16% d. 8.29%

18.Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to
be constant at 3.20% per year. What is the real risk-free rate of return, r*?
a. 3.80% c. 4.19%
b. 3.99% d. 4.40%

19.The real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the
maturity risk premium is zero. What is the equilibrium rate of return on a 1-year
Treasury bond?
a. 5.51% c. 6.09%
b. 5.80% d. 6.39%

20.5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity
risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these
bonds. What is the real risk-free rate, r*?
a. 2.59% c. 3.20%
b. 2.88% d. 3.52%

21.Assume that interest rates on 20-year Treasury and corporate bonds are as follows:
Treasury-bond = 7.72% Corporate Bond = 9.64%
The differences in these rates were probably caused primarily by:
a. Tax effects.
b. Default and liquidity risk differences.
c. Maturity risk differences.
d. Inflation differences.

22.Which of the following statements is CORRECT?

a. The shorter a project’s payback period, the less desirable the project is normally
considered to be by this criterion.
b. One drawback of the payback criterion is that this method does not take account
of cash flows beyond the payback period.
c. If a project’s payback is positive, then the project should be accepted because it
must have a positive NPV.
d. One drawback of the discounted payback is that this method does not consider
the time value of money, while the regular payback overcomes this drawback.

23.The net present value and internal rate of return methods of capital budgeting re
superior to the payback method in that they:
a. are easier to implement
b. consider the time value of money
c. require less input
d. reflect the effects of depreciation and income taxes.
24.How are the following used in the calculation of the net present value of a proposed
project?
Depreciation Expense Salvage Value
a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

25.(2pts )Taggart Inc. is considering a project that has the following cash flow data. What
is the project's payback?
Year 0 1 2 3
Cash flows -P1,150 P500 P500 P500
a. 1.86 years c. 2.30 years
b. 2.07 years d. 2.53 years

26.(2pts )Susmel Inc. is considering a project that has the following cash flow data. What
is the project's payback?
Year 0 1 2 3
Cash flows -P500 P150 P200 P300
a. 2.03 years c. 2.50 years
b. 2.25 years d. 2.75 years

27.(2pts )Cornell Enterprises is considering a project that has the following cash flow and
WACC data. What is the project's NPV? Note that a project's projected NPV can be
negative, in which case it will be rejected.
WACC: 10.00%
Year 0 1 2 3
Cash flows -P1,050 P450 P460 P470
a. P 92.37 c. P101.84
b. P 96.99 d. P106.93

28.(2pts)Fernando Designs is considering a project that has the following cash flow and
WACC data. What is the project's discounted payback?
WACC: 10.00%
Year 0 1 2 3
Cash flows -P900 P500 P500 P500
a. 1.88 years c. 2.29 years
b. 2.09 years d. 2.52 years

29.(2pts)Anderson Systems is considering a project that has the following cash flow and
WACC data. What is the project's NPV? Note that if a project's projected NPV is
negative, it should be rejected.
WACC: 9.00%
Year 0 1 2 3
Cash flows -P1,000 P500 P500 P500
a. P265.65 c. P292.88
b. P278.93 d. P307.52

30.(5 pts)A firm is considering Projects S and L, whose cash flows are shown below. These
projects are mutually exclusive, equally risky, and not repeatable. You were hired to
advise the firm on the best procedure. Decide which project should be considered after
computing its NPV, Payback Period, and Discounted Payback Period

WACC: 8.00%
Year 0 1 2 3 4

CFS -P2050 P760 P850 P830 P875

CFL -P4,300 P1400 P1400 P1400 P1400

a. P377.36 c. P418.14
b. P397.22 d. P439.04
 COR JESU COLLEGE,INC
Sacred Heart Avenue, Digos City
College of Accountancy, Business and
Entrepreneurship

FINANCIAL MANAGEMENT 1
Final Examination

Name:______________________________________________________ Score:______

TEST I. TRUE OR FALSE

1. 11. 21.
2. 12. 22.
3. 13. 23.
4. 14. 24.
5. 15. 25.
6. 16. 26.
7. 17. 27.
8. 18. 28.
9. 19. 29.
10. 20. 30.

TEST II. MULTIPLE CHOICE

1. 11. 21.
2. 12. 22.
3. 13. 23.
4. 14. 24.
5. 15. 25.
6. 16. 26.
7. 17. 27.
8. 18. 28.
9. 19. 29.
10. 20. 30.