Finance Test



Financial Management of the Firm




  1. Definitions. Define any 10 terms, and provide examples.


Risk                                 Beta                                Market premium

Capital structure               Preemptive rights             Dividend yield

Flotation costs                  Dividend                          ex dividend

Repurchase                      Required return                Recapitalization

Stock splits                      Expected return                NOWC

Dividend payout               Return on Invested           NOPAT                                                            capital                   Market Value Added



  1. Essay Questions. Answer the question below. Please be sure to complete all parts of the question.


  1. a) What is Weighted Average Cost of Capital ?

Explain and derive each component part.

  1. b) Utilizing the company that you have analyzed, estimate its WACC.
  2. c) What is capital budgeting ?
  3. d) What is a target capital structure ?
  4. e) Derive the Net Present Value methodology of capital budgeting, and explain the use of WACC.




III. Additional Essay Questions. Answer any two questions. Please be sure to complete all parts of each question that you select.


  1. Regarding equities (stock):
  2. What is stand-alone risk ?
  3. How is it measured ? Create an example and compute the risk


  1. What is market risk ?

(1) What is the connection of a stock to market risk ?

(2) Define and provide the formula to determine a stock’s market



  1. a) What is an Investment portfolio ?
  2. b) Create a portfolio, and solve for the portfolio expected return.

[Suggestion: Pick 4 – 10 different companies to comprise the


  1. c) What is the Capital Asset Pricing Model ?

What are the important conclusions that this model offers

regarding investment portfolios ?




  1. a) What is a target capital structure ?
  2. b) How does the WACC relate to the target capital structure ?
  3. c) What is operating leverage ?

How does the degree of operating leverage affect capital structure

decisions ?

Create an example.



  1. a) Why must working capital be “managed” ?
  2. b) What is (are) the goal(s) of working capital management ?
  3. c) What is the Cash Conversion Cycle ? Create an example and

explain its purpose.

  1. d) Create an example and explain the Cash Budget.
  2. e) How is a Cash Budget distinct from an Income Statement ?
  3. f) What are some techniques that a company may undertake to

improve its working capital position ?




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