Managerial Finance Exam Questions
with Answers
What are the advantages and disadvantages of different forms of business organizations? -
✔✔Advantages: No corporate tax, easy to form, few regulations
Disadvantages: Difficult raising capital, unlimited liability, limited life
Know which form is best for difficult business situations - ✔✔Solo, simple → Proprietorship
Two+ owners sharing profits → Partnership or LLP (for professionals)
Need lots of outside money/investors → Corporation
Want limited liability but simple tax → LLC
What are stock prices? - ✔✔Stock prices are easy to determine and can be found on the
internet
What is intrinsic value? - ✔✔Intrinsic values are estimates, different analysis with different
information
What happens to stock prices and intrinsic value in equilibrium? - ✔✔In equilibrium a stocks
price should equal its "true" or intrinsic value
What to know when identifying whether a stock price is under or over valued - ✔✔Undervalued
= stocks market is below its estimated true value (worth more than current market price)
Overvalued = stocks market price is above its estimated value (worth less)
What is the agency relationship? - ✔✔A relationship between stockholders and managers
, What is the agency problem? - ✔✔When conflicts of interest can exist between the principal
and the agent
What are some of the factors that affect managerial behavior? - ✔✔Managerial compensation
packages, direct invention by shareholders, the threat of firing, the threat of takeover
Why was Phil Knight reluctant to go public? (Nike example) - ✔✔Because of the decrease in
decision making power, profit sharing, conflicts in interests, managers could want to make long-
term investments that will grow the company in long-term, managers could make firm
decisions that would maximize their own profit
What is a balance sheet? - ✔✔A snapshot of financial statements of one point in time
What is an income statement? - ✔✔Summarizes sales and cost in each period
What is a statement of cash flow? - ✔✔Reports the impact on the activities of the firm's cash
What is the statement of stockholder's equity? - ✔✔Reports how much firms retain their
earnings
What is a free cash flow? - ✔✔the amount of cash that could be withdrawn without harming a
firm's ability to operate and produce future cash flows
What is capital expenditure? - ✔✔Investments in fixes assets
What is net operating working capital? - ✔✔The difference between a company's non-interest
bearing operating current assets
with Answers
What are the advantages and disadvantages of different forms of business organizations? -
✔✔Advantages: No corporate tax, easy to form, few regulations
Disadvantages: Difficult raising capital, unlimited liability, limited life
Know which form is best for difficult business situations - ✔✔Solo, simple → Proprietorship
Two+ owners sharing profits → Partnership or LLP (for professionals)
Need lots of outside money/investors → Corporation
Want limited liability but simple tax → LLC
What are stock prices? - ✔✔Stock prices are easy to determine and can be found on the
internet
What is intrinsic value? - ✔✔Intrinsic values are estimates, different analysis with different
information
What happens to stock prices and intrinsic value in equilibrium? - ✔✔In equilibrium a stocks
price should equal its "true" or intrinsic value
What to know when identifying whether a stock price is under or over valued - ✔✔Undervalued
= stocks market is below its estimated true value (worth more than current market price)
Overvalued = stocks market price is above its estimated value (worth less)
What is the agency relationship? - ✔✔A relationship between stockholders and managers
, What is the agency problem? - ✔✔When conflicts of interest can exist between the principal
and the agent
What are some of the factors that affect managerial behavior? - ✔✔Managerial compensation
packages, direct invention by shareholders, the threat of firing, the threat of takeover
Why was Phil Knight reluctant to go public? (Nike example) - ✔✔Because of the decrease in
decision making power, profit sharing, conflicts in interests, managers could want to make long-
term investments that will grow the company in long-term, managers could make firm
decisions that would maximize their own profit
What is a balance sheet? - ✔✔A snapshot of financial statements of one point in time
What is an income statement? - ✔✔Summarizes sales and cost in each period
What is a statement of cash flow? - ✔✔Reports the impact on the activities of the firm's cash
What is the statement of stockholder's equity? - ✔✔Reports how much firms retain their
earnings
What is a free cash flow? - ✔✔the amount of cash that could be withdrawn without harming a
firm's ability to operate and produce future cash flows
What is capital expenditure? - ✔✔Investments in fixes assets
What is net operating working capital? - ✔✔The difference between a company's non-interest
bearing operating current assets
