Managerial Finance Exam Questions
with Answers
What factors do we need to know to value a financial asset? - ✔✔the present value (PV) of its
future cash flows. To determine this, we need to know the cash flows (CFs), required rate of
return (k), and the time frame.
Explain what happens to unsystematic risk in a portfolio. - ✔✔is firm specific risk and thus
diversifiable. It can be reduced by combining stocks in a portfolio that are not perfectly
correlated.
What is the significance of correlation as it relates to risk in a portfolio? - ✔✔Positively
correlated stocks have rates of return that move in the same direction while negatively
correlated stocks have rates of return that move in opposite directions. Thus, when stocks are
positively correlated there is no risk reduction while when stocks are negatively correlated
there is risk reduction.
A company decides to withhold dividends in the next year due to excellent investment
opportunities. What should happen to the price of the stock in the short run? In the long run? -
✔✔In the short run, the stock price will decrease because dividends aren't being paid. In the
long run, the stock price will increase if the investment causes an increase in cash flows.
Explain why a 12-year bond has more price fluctuation than a 1-year bond when other things
are held equal. - ✔✔It has more price fluctuation because there are more cash flows to be
impacted by the time value of money.
Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for $100,000? -
✔✔N=15
I=9
PMT= 12,000
, FV= 0
PV= ($96,728.26) Polly should sell now for $100,000 because the value of the 15 years of cash
flows is only $96,728.26.
Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for $100,000?
At a growth rate of 9 percent annually, how long will it take for a sum to triple? - ✔✔I= 9
PV= (1)
PMT= 0
FV= 3
N= (12.75 years)
Jean Splicing invested $20,000 10 years ago at 12 percent, compounded quarterly. How much
has she accumulated? - ✔✔N= 40 (10x4)
I= 3 (12/4)
Pv= (20,000)
PMT= 0
PV = ($65,240)
Because interest is compounded quarterly, we need to make adjustments in "N" and "I".
Additionally, the "ICONV" function on the calculator can be used to convert 12% compounded
quarterly to 12.55% compounded annually.
Explain why the answer in A is discounted. - ✔✔The market rate is greater than the coupon
rate. A person looking to buy a bond will want one at the market rate of 14% instead of this
bond's 8% to get larger payments. The bond will have to be sold at the discounted price of
$825.18 for it to be equal to the consumer to buy this bond or a new one at the market rate
Explain what makes up the price of a bond. - ✔✔The present value of its cash flows: The
coupon payments plus its maturity value.
with Answers
What factors do we need to know to value a financial asset? - ✔✔the present value (PV) of its
future cash flows. To determine this, we need to know the cash flows (CFs), required rate of
return (k), and the time frame.
Explain what happens to unsystematic risk in a portfolio. - ✔✔is firm specific risk and thus
diversifiable. It can be reduced by combining stocks in a portfolio that are not perfectly
correlated.
What is the significance of correlation as it relates to risk in a portfolio? - ✔✔Positively
correlated stocks have rates of return that move in the same direction while negatively
correlated stocks have rates of return that move in opposite directions. Thus, when stocks are
positively correlated there is no risk reduction while when stocks are negatively correlated
there is risk reduction.
A company decides to withhold dividends in the next year due to excellent investment
opportunities. What should happen to the price of the stock in the short run? In the long run? -
✔✔In the short run, the stock price will decrease because dividends aren't being paid. In the
long run, the stock price will increase if the investment causes an increase in cash flows.
Explain why a 12-year bond has more price fluctuation than a 1-year bond when other things
are held equal. - ✔✔It has more price fluctuation because there are more cash flows to be
impacted by the time value of money.
Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for $100,000? -
✔✔N=15
I=9
PMT= 12,000
, FV= 0
PV= ($96,728.26) Polly should sell now for $100,000 because the value of the 15 years of cash
flows is only $96,728.26.
Polly Graham will receive $12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for $100,000?
At a growth rate of 9 percent annually, how long will it take for a sum to triple? - ✔✔I= 9
PV= (1)
PMT= 0
FV= 3
N= (12.75 years)
Jean Splicing invested $20,000 10 years ago at 12 percent, compounded quarterly. How much
has she accumulated? - ✔✔N= 40 (10x4)
I= 3 (12/4)
Pv= (20,000)
PMT= 0
PV = ($65,240)
Because interest is compounded quarterly, we need to make adjustments in "N" and "I".
Additionally, the "ICONV" function on the calculator can be used to convert 12% compounded
quarterly to 12.55% compounded annually.
Explain why the answer in A is discounted. - ✔✔The market rate is greater than the coupon
rate. A person looking to buy a bond will want one at the market rate of 14% instead of this
bond's 8% to get larger payments. The bond will have to be sold at the discounted price of
$825.18 for it to be equal to the consumer to buy this bond or a new one at the market rate
Explain what makes up the price of a bond. - ✔✔The present value of its cash flows: The
coupon payments plus its maturity value.
