C214 Financial Management Questions & Answers; With Solutions 2025

C214 Financial Management Questions & Answers. With Solutions 2025 The following questions are for practicing both calculations and concepts for C214 – Financial Management Version 4. This list of questions does not cover everything you may encounter in an assessment and covers aspects to the course that may not appear on the assessments. They are in the same order as the topics presented in the e-text. Overview of Finance 1. Trading on the NYSE is executed without a specialist (i.e. a market maker). True/False* 2. Stocks and bonds are two types of financial instruments *True/False 3. When revenue is matched with cost of sales in an income statement it is called: 4. A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report: Revenues of Expenses of Income Statement/Balance Sheet 5. A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3? NI = 125, 6. A basic equation for the balance sheet is: 7. Why is the Balance Sheet known as a permanent statement? 8. How do you calculate the change in Retained Earnings? 9. Sales minus Cost of Sales minus other expenses equals what? 10. Name four accounts that are part of total assets? 11. Name three accounts that are part of current assets? 12. Name four accounts that are part of Total Liabilities? Statement of Cash Flows 13. Intel reported the following for 2014: Net Income 100,000 Depreciation 20,000 Change in A/R 10,000 What is the cash flow from operating activities? 14. Name three accounts that are only included in Cash Flow from Financing (CFF)? 15. Define the Statement of Cash Flows: 16. Intel reported the following for 2014: Gross Equipment (1/1/14) 50,000 Gross Equipment (12/31/14) 65,000 Net income 100,000 Depreciation 20,000 What is the cash flow from investing activities for 2014? 17. What is the Cash Flow from Operations given the following information? Net Income 450,000 Change in Accounts Receivable 120,000 Change in Inventory - 90,000 Change in PP&E 60,000 Depreciation Expense 110,000 Change in Accounts Payable 50,000 Change in Accrued Expenses - 75,000 Change in Common Stock 300,000 18. What is the Cash Flow from Investing? Increase in Gross PP&E 125,000 Beginning Net PP&E 750,000 Ending Net PP&E 850,000 Depreciation Expense 25,000 19. What is the Cash Flow from Investing? Beginning Net PP&E 250,000 Ending Net PP&E 300,000 Depreciation Expense 40,000 Change in Long Term Investments 100,000 Change in Short Term Investments 50,000 20. What is the Cash Flow from Financing? Accounts Payable 100,000 Accrued Expenses 50,000 Increase in Mortgage Payable 300,000 Decrease in Bonds Payable 75,000 Dividends Paid 80,000 21. When Fixed Assets increase what happens to Cash? 22. Last year a firm recorded Net PP&E of $4,600 while this year the same firm recorded Net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800 respectively, what is the CFI of the company? (assume no asset disposals) 23. Which is the purpose of the statement of cash flows? 24. Financial data for Intel is given below for 2014: • EBIT 1,000,000 • Depreciation 30,000 • Change in working capital (10,000) • Net capital expenditures 15,000 • Tax rate 40% Compute the Free Cash Flow for 2014 Financial Ratios 25. Suppose the inventory turnover of a company is higher than the industry. Based on this observation, what likely happened? 26. Intel provides the following data for 2014: • A/R 600 • Inventory 800 • Fixed Assets 1,000 • A/P 500 • Long term debt 900 • Common Stock 400 What is the current ratio? 27. If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? 28. A company has cash of 100, accounts receivable of 250, inventory of 300, and accounts payable of 300. What is the quick ratio? 29. A company has cash sales of 200 and credit sales of 750. It’s average accounts receivable is 90. What is the A/R turnover? 30. The OIROI (Operating Income Return on Investment) uses what elements on the income statement? 31. Why would a company be interested in the TAT (Total Asset Turnover) ratio? 32. If a company has current assets of 80 and fixed assets of 120, if Sales are 150 and EBIT is 35, what is the Fixed Asset Turnover? 33. If a company has current assets of 90 and fixed assets of 140, if it has debt of 125, what is its debt ratio? 34. A company has sales of 300, expenses of 200 and interest expense of 25, what is its Times Interest Earned ratio? 35. Suppose a firm has a financial leverage ratio of 2.50 which indicates the ratio that the firm’s assets are financed by debt. What is percentage of the firm’s assets is financed by equity? Time Value of Money – Perpetuities 36. What is the present value of a stream of cash flows of $125,000 at a discount rate of 7%? 37. What is the discount rate of a stream of cash flows of 50,000 that have a present value of 450,000? 38. What is the cash flow stream for a present value 1,000,000 at 5% paid in equal installments in the future? 39. A woman has just found out that a rich great-aunt has bequeathed a trust fund that pays $50,000 to her and to her descendants forever. If the trust fund earns 3.5% interest, what is the amount of the trust fund? Time Value of Money 40. A couple wants to save up for a down payment on a house. They think they need to save 100,000 in five years. If the interest rate is 4% and they start at the end of the year when they both get bonuses from their employers, what do they have to put aside annually? 41. A person wants to put aside $500 at the beginning of each month for 10 years. If she estimates an interest rate of 5.5%, what will she have in her savings account at the end? Hint: Make the calculator inputs consistent. 42. A ten-year-old girl can put aside $45 at the end of each month for her college education. If she has eight years before she starts higher education, how much will she have in her savings if she can get 5% interest? 43. A mother wants to help her child’s higher education fund. She wishes to have $15,000 available each year for six years. Her child starts college in 15 years and she can save 6% before school starts if she puts her end-of-year bonus into a trust fund and figures that the fund will earn 4% after her child begins her college education. What does she have to put aside annually if the money is withdrawn for college at the beginning of each year attending college? Hint: Two-Step problem. 44. A man has just inherited $250,000. If he invests the money at 4.5%, what can he expect to have at the end of 15 years when he retires? Debt Valuation 45. What annual interest will be paid for a zero coupon bond? 46. What is the most significant characteristic of subordinated debt? 47. If a company wants to increase its debt capital, how will they raise the funds? 48. What is the lowest level of investment- grade bonds? 49. A company wishes to issue 10 year bonds with a face value of $1,000 and a coupon rate of 5.5%. The market has shifted before the issuance and the bonds will sell at 94% of face value. What is the YTM of the bonds when they are sold? 50. You want to buy a semiannual bond that has 4 years left before maturity. It has a 6% coupon rate and the market yield is currently 5.2%. What is the price you are willing to pay? 51. What is the price of a 1- year $1,000 bond with a 3% coupon rate if the YTM is 5.2%? 52. A 5% semiannual $1,000 bond matures in 4 years. What is the YTM if the price is $1,069? 53. What can cause the bond price to fluctuate? 54. You want to sell a bond for over $1,000. Can you do that if the coupon rate is 6.5% and the bond yield is 6.8%? 55. A $1000 3% bond with a yield of 2.4% matures in 6 years. What is the price if the interest payments are made semiannually? 56. What is the price of a six-year $1,000 bond with a coupon rate of 7.4% and a YTM of 6.2%? 57. What does a company use as security for a bond? 58. A bond issued with a face value of $1,000 pays a 3% coupon rate and matures in seven years. If an investor wants a yield of 4%, what is the investor willing to pay for the bond? 59. An investor wants to know what the yield to maturity is for a $1,000 bond with a 5.5% coupon rate that matures in 5 years if the current market price is $955? a. Effective Yield – APR vs. APY 60. Which of the following gives the largest effective yield (APY) 18.6% compounded monthly, or 18.6% compounded daily, or 18.6% compounded weekly or 18.6% compounded yearly? 61. Suppose that an investment will pay 24% APR for a year and the interest will be compounded monthly. What is the effective yield (APY) for the investment? Equity Valuation – Gordon Growth Model 62. A company just paid a dividend of 2.30 to its shareholder. It estimates that future growth will be at 2%. What is the value of the stock if you are looking for an 8% return on your investment? 63. If you are looking for a return of at least 10%, what would you invest in a company given that it just paid a dividend of 1.80, and estimates a growth rate of 3%? 64. You are interested in buying a preferred stock and want to know what the rate of return is. The stock is selling for $85.00 and pays a dividend today of $2.25. What is the rate of return? 65. The company expected to pay a dividend of $13.85 at the end of the year. Management has estimated growth at 2.75% and the stock is currently selling for $290.00. What is the expected rate of the return for this investment? 66. One of your friends is recommending a stock if it sells for more than $165.00 per share. The growth rate is 4% and the latest dividend was $6.00. You are expecting an 11% return. Why is the calculated value of the stock? 67. An investor wishes to know what the value of a common stock is if it pays a dividend of $6.00 today. The company’s growth rate is 4.5% and the investor wants expects the stock to earn 7%. What is the value? 68. If a common stock is worth $75 and the growth rate is 5% with a dividend expected to pay $2.00 in a year’s time, what is the expected rate of return? 69. An investor wishes to know what the value of preferred stock, when the dividend is $3.00 per share and the expected rate of return is 6.5%? Capital Asset Pricing Model and Risk 70. Under the Efficient Market Hypothesis, what will companies endeavor to do? 71. What does the beta coefficient represent? 72. What is the result of Capital Asset Pricing Model analysis? 73. If an investor knows the idiosyncratic risk, the investor knows the: Capital Budgeting 74. What is the initial outlay given the following information: • Equipment Price 375,000 • Installation 10,000 • Power Survey 30,000 • Shipping 8,000 • Working Capital 100,000 • Project Marketing Report 15,000 75. What is the initial outlay given the following when a new piece of equipment replaces an old one: • Old equipment sells for 125,000 • Book value of old equipment 22,000 • Tax rate 40% • New equipment cost 800,000 • Site survey 18,000 • Installation cost 20,000 76. What is the initial outlay from the following information? • Old equipment sells for (net of taxes) 55,000 • New equipment at cost 190,000 • Installation and shipping 18,000 • Working Capital 62,000 77. A project has sales of 300,000, general expenses of 195,000 and depreciation expense of 25,000. The tax rate is 35%. What is the differential cash flow? 78. Why is depreciation expense taken out of the net income calculation, yet added back at the end? 79. A project has net income of 750,000 including depreciation expense of 42,000. What is the differential cash flow? 80. A piece of equipment is to be sold at the end of the project. Its appraised value is 420,000. A company makes an offer for 350,000. The equipment has a book value of 75,000. The tax rate is 40%. What is the salvage value if the company accepts the offer? 81. A piece of equipment was sold at the end of the project. The project received 85,000 for the equipment that carried a book value of 75,000. The tax rate is 35%. What is the salvage value? 82. A project is closing. Equipment is sold for 50,000 even though the book value was 75,000. The tax rate is 30%. The project started with 100,000 in working capital. What is the terminal cash flow? 83. Equipment is scrapped at the end of the project and has a book value of 20,000. The tax rate is 35%. The projected started with 75,000 of working capital. What is the terminal cash flow? 84. Equipment is sold for 30,000 at the end of a project. The working capital return is 50,000. The tax rate is 40%. What is the terminal cash flow? 85. Why would we reject project based on NPV? 86. Why would we reject this project based on the IRR? 87. What are two key elements of differential cash flow: 88. From the following information, calculate the terminal cash flow. • Proceeds from sale of equipment 100,000 • Book Value of equipment sold 50,000 • Year 3 Diff Cash Flow 225,000 • Tax rate 40% • Depreciation Yrs 1 to 5 125,000 • Working Capital Return 75,000 89. If the Investment is 140,000, then what is the Net Present Value, given a Total Present Value of 154,606? 90. Why is the NPV preferred over the IRR? Two answers 91. What is the IRR given the following: Investment is $250,000, Yr 1: 50,000, Yr 2 is 60,000, Yr 3 is 80,000, Yr 4 is 100,000, Yr 5 is 90,000, the terminal cash flow is 45,000? 92. If a WACC of 15.00% is used to compute the NPV, what does the IRR computed in previous question above tell us about the project? Financial Forecasting - Discretionary Financing Needed 93. If Sales are $1,000,000, then what are the total current assets given the following: • Cash 25% of Sales • Accounts Receivable 13% of Sales • Accounts Payable 10% of Sales • Accrued Payroll 5% of Sales • Cost of Goods Sold 50% of Sales • Inventory 15% of Cost of Goods Sold 94. Mountain Inc. forecasts sales of 450 million. It has established the following percentages of spontaneous accounts: 5% of Cash, 17% of A/R, 11% of Inventory, 48% of PP&E, 18% of A/P. A mortgage of 30 million, bonds of 50 million, equity of 150 million and earnings of 35 million. What is the DFN? 95. Dishwasher Heaven, Inc. forecasts sales of 750,000. Their financial department has developed the following forecast percentages based on historical averages: Cash 11%, A/R 8%, 13% for inventory and accounts payable of 14%. Property Plant and Equipment is 210,000. The company has long term debt of 120,000 and equity of 85,000. It estimates profits at 55,000. What is the DFN? Financial Forecasting – Sustainable Growth Rate 96. Dinosaur Chicken Co. had sales of 70,000,000, expenses of 50,000,000 and paid 40% in taxes. It has equity of 42,000,000. The board approved dividends totaling 4,500,000. What is the company’s Sustainable Growth Rate? 97. UltraGrunge, Inc. earned 25 million after tax in the last year. The company has 100 million in assets and 85 million in equity. It has a policy of paying 12% of earnings as dividends. What is the SGR of UltraGrunge? 98. What is the increase in Retained Earnings given the following: • Sales are $10 million • Net Earnings pre-tax are $1 million • Dividend payout ratio is .12 • Tax rate is 40% 99. What is the Sustained Growth Rate given the following: • Sales are 2.5 million • Total Expenses (including cost of goods sold through taxes) 2.0 million • Total Assets are 3.0 million • Equity is 1.3 million • Dividend payout ratio is .25 Capital Structure 100. When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability? 101. A company has an EBIT of 700,000 and interest expense of 30,000. B company has EBIT of 1,500,000 and interest expense of 30,000. Which company has a higher degree of financial leverage? 102. What is the operating leverage of the Company Y? How will that affect profits compared with Company Z that has an operating leverage of 5.25? Company Y has an EBIT of 3,000,000, Sales of 25,000,000 and variable expenses of 18,000,000 103. What is the financial leverage of Company A? How will that leverage affect profits compared to Company B if sales decrease? For Company A, EBIT is 500,000, interest expense is 50,000, Sales are 4,500,000, and variable costs are 3,000,000. 104. What is the degree of combined leverage when EBIT is 700,000, interest expense is 100,000, Sales is 3,500,000 and variable costs are 1,200,000? 105. What is the Degree of Operating Leverage given Sales of 100,000. Variable Costs of 75,000 and EBIT of 10,000? 106. What does the Degree of Financial Leverage indicate? 107. If a company has a high degree of financial leverage, what does that tell us about the firm’s risk profile? Working Capital Management 108. What is the cash cycle? 109. Why is float important to understand? 110. What should a company do to manage its working capital? 111. Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? 112. Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the relative credit policies of each company? 113. Which of the following characterizes increased collection float 114. Company A’s inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? 115. In regards to Accounts Payable balances, what is a good policy: Firm Valuation 116. Ajax, Inc. is seeking to sell the company, but it is a private company with no sales of stock to determine its market value. It has Earnings of $1,200,000 on 350,000 shares. Epsilon Manufacturing is a direct competitor and of equal size and profitability. Its stock sells for $21 per share and has earnings per share of $3.80. What is value of Ajax? 117. Ham Corp. is seeking to buy Eggs, Inc. Eggs is a private company. Eggs had an EPS of 2.80 last year and has 125,000 shares outstanding. Ham Corp. stock sells for $43.00 and has an EPS of 5.00. Ham is larger than Eggs, but sees both companies as operating in similar markets. What is the value of Eggs? 118. What would be a source of information to determine Replacement Cost? 119. What is the company valuation given the following: Cash Flows: Yr 1 $80,000, Yr 2 $100,000, Yr 3 $95,000, Yr 4 $80,000 Discount Rate 7% 120. What is the Discounted Cash Flow of the company with the following Cash Flows: Cash Flows: Yr 1 $100,000, Yr 2 $150,000, Yr 3 $150,000, Future Forecasted Annual Cash Flows $100,000. Discount Rate 5% Hint: the forecasted annual cash flows is a perpetuity. 121. If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the relative value of Company Z? 122. Calculate the Free Cash Flow given the following information: • Net Working Capital increases by 20,000 • Tax Rate is .40 • EBIT is 250,000 • Capital Expenditures are 10,000 • Depreciation is 15,000 123. If a company has a constant growth rate estimated at 5% and a Free Cash Flow of 150,000, what is its estimated valuation (terminal value)? Government Regulation 124. Dodd-Frank regulates which segment of the U.S. Economy? 125. What is the regulatory body that oversees the systematic risk in banking? 126. The SEC Securities & Exchange Commission requires companies to do the following: (pick two) 127. What does the Sarbanes-Oxley Act require companies to do? 128. FINRA (Financial Industry Regulatory Authority) does the following: 129. The Financial Stability Oversight Council monitors what aspect of the banking industry: Global Financing 130. If a product is made 100% domestically, what can affect its domestic market? 131. If a company makes its product in a foreign country where labor costs are much lower, what happens? 132. If the value of a dollar increases, the price of imports: 133. Why would a farmer buy a hedge when he signs a contract to sell produce overseas?