FINANCIAL MANAGEMENT (REVISION QUESTIONS)

Exam Coverage:
T1. Topic 1 Chapter 1 Financial Management
T2. Topic 3 & 4 Chapter 3 & 4 Time Value of Money
T3. Topic 5 Chapter 5 Interest rate
T4. Topic 6 Chapter 9 Capital Budgeting Decision Models
T5. Topic 9 Chapter 17 Dividends, Dividends Policy and Stock Splits
T6. Topic 10 Chapter 18 International Financial Management
Exam Format:
ØFour Written Questions (25 marks each)
ØMixture of Theoretical concept and application questions
ØFormula Sheet is provided at the end of the paper.
Sample Question & Key word to answer
1 Identify the main objective of the finance manager The primary goal of the finance manager is to maximize the equity value/economic T1
value of the firm.
2 Who is become principak under Agency Theory Owner/Stakeholders/Shareholders T1
3 What is the biggest problem under the princiapl agent problem different goals /expectation/interest T1
4 _______ is the movement of money from lender to borrower and The cycle of money T1
back again. It is often accomplished through a financial intermediary
like a bank. The common objective is to make both the lender and
the borrower better off.
5 Let’s say John deposits $200 for a year in an account that pays 6% FV = $200 + ($200 x .06) = $212 T2
per year. At the end of the year, he will have:
6 Let’s say you just won a jackpot of $50,000 at the casino and would •PV = FV x 1/ (1+r)n T2
like to save a portion of it so as to have $40,000 to put down on a •PV = $40,000 x 1/(1.06)5
house after 5 years. Your bank pays a 6% rate of interest. How •PV = $29,890.33è Amount needed to set
much money will you have to set aside from the jackpot winnings?
7 Assume you put $2,000 into a tax-free investment and leave it there According to the Rule of 72, an investment earning 8% a year will double in value T2
for 45 years at an annual rate of 8%. According to the Rule of 72, approximately every 9 years. Thus, the $2,000 will grow to about $64,000 in 45 years.
your investment will grow to what value? In 45 years, the original investment will double five times ($2K × 2 = $4K, $4K × 2 = $8K,
$8K × 2 = $16K, $16K × 2 = $32K, and $32K × 2 = $64K).
According to the Rule of 72, your investment will grow to a value of about $64,000
8 Jim deposits $3,000 today into an account that pays 10% FV = PV x (1+r)n T2
per year, and follows it up with 3 more deposits at the end FV of Cash Flow at T0 = $3,000 x (1.10)3 = $3,000 x 1.331 = $3,993.00
of each of the next three years. Each subsequent deposit FV of Cash Flow at T1 = $5,000 x (1.10)2 = $5,000 x 1.210 = $6,050.00
FV of Cash Flow at T2 = $7,000 x (1.10)1 = $7,000 x 1.100 = $7,700.00
is $2,000 higher than the previous one. How much money
FV of Cash Flow at T3 = $9,000 x (1.10)0 = $9,000 x 1.000 = $9,000.00
will Jim have accumulated in his account by the end of
Total = $26,743.00
three years?
9 A series of equal periodic finite cash flows that occur at the annuity due T2
beginning of the period are known as a/an _____
10 You dream of endowing a chair in finance at the local university that PV = PMT/r = $150,000/.05 = $3,000,000. T2
will provide a salary of $150,000 per year forever, with the first cash Example of Perpetuity
flow to be one year from today. If the university promises to invest
the money at a rate of 5% per year, how much money must you give
the university today to make your dream a reality?
11 What type of loan requires both principal and interest payments as Amortized loan T3
you go by making equal payments each period?
12 What is the EAR if the APR is 10.52% and compounding is daily? EAR = [(1 + APR/m)m] -1 = [(1 + 0.1052/365)365] -1 = 11.0916%. T3
13 Suppose you postpone consumption and invest at 10% when We can see that an inflation rate of 3% is 7% less than our 10% investment rate. Thus, T3
inflation is 3%. What is the approximate real rate of your reward for 7% is the real rate of your reward for saving.
saving?
14 The ________ compensates the investor for the additional risk that default premium T3
the loan will not be repaid in full.
15 The Fisher Effect states the relationship between the nominal rate r = r* + h + (r* × h). This gives r = 5% + 4% + (5% × 4%) = 9.2%. T3
(r), the real rate (r*), and inflation (h). Suppose r= 5% and h = 4%. the real rate, the inflation rate, and the product of the real rate and inflation
Under Fisher Effect, what is the nominal rate? The product of the real rate and the inflation rate can be thought of as the additional
compensation needed for the fact that the interest being earned during the year is also
subject to inflation or a loss of purchasing power at the end of the year.
16 Consider the following four-year project. The initial after-tax outlay We can see that after three years, we will have paid back $900,000. Thus, we only need T4
or after-tax cost is $1,000,000. The future after-tax cash inflows for $100,000 in after-tax cash flows in the 4th year. Because we get $200,000 in the fourth
years 1, 2, 3 and 4 are: $400,000, $300,000, $200,000 and $200,000, year, the rule of thumb is to divide what is needed by the cash inflows we will get next
respectively. What is the payback period without discounting cash period and add the results to the number of previous periods of cash inflows, e.g.,
flows? ($100,000 divided by $200,000) + 3 which gives 3.500. Thus, the payback period is 3.5
years.
17 There are two ways to correct for projects with unequal lives when *One way is to find a common life by extending the projects to the least common T4
using the NPV approach. Please mention at least 1 of them multiple of their lives.
* The other way is to deal with unequal lives is by finding the equivalent annual annuity
(EAA) for the NPV of each project over the life of the project.
18 Which method is designed to give the dollar amount of return Profitability Index Method T4
for every $1.00 invested in the project in terms of current
dollars?

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 FINANCIAL MANAGEMENT (REVISION QUESTIONS)
Exam Coverage:
T1. Topic 1 Chapter 1 Financial Management
T2. Topic 3 & 4 Chapter 3 & 4 Time Value of Money
T3. Topic 5 Chapter 5 Interest rate
T4. Topic 6 Chapter 9 Capital Budgeting Decision Models
T5. Topic 9 Chapter 17 Dividends, Dividends Policy and Stock Splits
T6. Topic 10 Chapter 18 International Financial Management
Exam Format:
ØFour Written Questions (25 marks each)
ØMixture of Theoretical concept and application questions
ØFormula Sheet is provided at the end of the paper.
Sample Question & Key word to answer
19 The ________ is the date when the board of directors announces declaration date T5
the next cash dividend to the public.
20 Surf City Inc. has decided on a 3-for-1 stock split. If the firm currently A 3-for-1 stock split = 3 × 900,000 shares = 2,700,000 shares. A stock split in and of T5
has 900,000 shares outstanding, how many shares will be itself has no value. However, the split may send a signal to the market of positive
outstanding after the stock split? expectations for the firm.
21 List and describe (at least 1 of ) three reasons for a low-dividend- * First, lower dividends avoid or postpone the payment of taxes on distributions for T5
payout policy shareholders. Dividends are taxed as ordinary income, whereas capital gains are
frequently taxed at a special rate that is lower than ordinary tax rates. If dividends are
low or nonexistent, investors may choose to supplement current cash flow by selling
shares of stock and being taxed at the (sometimes) lower capital gains rate, or they can
delay cash flow and thus delay payment of taxes. By making a zero or small dividend
distribution, the firm allows the shareholder to determine the timing of cash flow and
taxes from stock ownership.
* Second, lower dividends today allow for higher potential future returns for
shareholders. By making low or no dividend payouts, the firm can reinvest more money
into the firm and thus provide for more rapid growth.
* Finally, there is less need for additional costly outside financing if firms use internally
generated funds for growth rather than incurring the cost and process of external
funding.
22 ________ means that the price of similar goods is the same, Purchasing power parity T6
regardless of which currency one uses to buy the goods.
23 Assume that you are the manager of a U.S. company and you face an By paying the Japanese company, you are converting yen into dollars and getting: T6
exchange rate of ¥150 per $1. Whenever you receive an order, = $50 per item. Because you collect $55 per item sold to your customer, your
rather than ship from your production facilities, you call in the order profit per item is $55 - $50 = $5 per item.
to a Japanese company and have the bill shipped to you directly. If
the bill shipped to you is ¥7,500 and you can collect $55 per item
sold to your customer, what would be your profit if you pay the
Japanese company ¥7,500?
24 ________ is a financial term for "free money," that is, the Arbitrage T6
opportunity to make a profit without risk.
25 ________ deals with possible negative effects of converting financial Translation exposure T6
statements from foreign operations into domestic currency for
consolidated reporting in the home country.

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