Test bank findamental of finance management 10e

CONTENTS PREFACE Major Changes in this Edition v Revised Structure of the Test Bank vi Difficulty Level vi Time Requirements and Financial Calculators vi Debugging the Questions vii Computerized Test Banks vii Student Preparation for a Test Bank Exam The Examination Process viii ix Other Uses of the Test Bank x Grade Curving and the Computerized Grading System x Acknowledgments xi Correspondence xi Microsoft Excel® Grade Record xii iii TEST QUESTIONS Chapter An Overview of Financial Management 1-1 Chapter Financial Statements, Cash Flow, and Taxes 2-1 Chapter Analysis of Financial Statements 3-1 Chapter The Financial Environment: Markets, Institutions, and Interest Rates 4-1 Chapter Risk and Rates of Return 5-1 Chapter Time Value of Money 6-1 Chapter Bonds and Their Valuation 7-1 Chapter Stocks and Their Valuation 8-1 Chapter The Cost of Capital 9-1 Chapter 10 The Basics of Capital Budgeting 10-1 Chapter 11 Cash Flow Estimation and Risk Analysis 11-1 Chapter 12 Other Topics in Capital Budgeting 12-1 Chapter 13 Capital Structure and Leverage 13-1 Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases 14-1 Chapter 15 Managing Current Assets 15-1 Chapter 16 Financing Current Assets 16-1 Chapter 17 Financial Planning and Forecasting 17-1 Chapter 18 Derivatives and Risk Management 18-1 Chapter 19 Multinational Financial Management 19-1 Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles 20-1 Mergers and Acquisitions 21-1 Chapter 21 iv PREFACE This Test Bank is designed for use with Fundamentals of Financial Management, Tenth Edition Major Changes in this Edition At the University of Florida, where the introductory finance course is taught in a mass lecture to over 1,000 students, machine-gradable, multiple-choice examinations are absolutely necessary Further, the questions must be absolutely unambiguous (or at least very close to unambiguous), because it is physically impossible to clarify questions once a test is underway (we test in 10 large rooms spread over a large campus), and a testing system that students perceive as being even slightly unfair would cause a riot The test questions should also require an understanding of concepts and relationships, not just a good memory, and that makes the task of test construction much more difficult We have taught the course for the past three years, as we were revising Fundamentals, and as much time went into the preparation of test questions as into the text itself At this point, we are so satisfied with the Test Bank that we would still use objective exams even if we went back to a class size of 30 Significant changes were made in Fundamentals, and the Test Bank reflects these changes Many new problems were added This edition of Fundamentals has been written under the assumption that financial calculators will be used Consequently, only financial calculator solutions are shown, and there are no separate financial calculator sections In addition, to streamline this edition, some materials have been moved to web appendices Test bank problems related to this material have been included in a “Web Appendix Section” within each chapter Both the regular South-Western computerized test bank (ExamView) and the Microsoft Word® test bank make it easy to construct exams that automatically have answer keys attached, to edit exam questions, to add your own questions, and to produce alternative versions of the same exam More will be said about the computerized test banks later in this preface Instructors who use the paper copy of the Test Bank will also benefit from the descriptor line for each question/problem Rather than searching through each chapter for questions dealing with specific topics, the instructor can now turn to the solution listing, which immediately follows the problem listing, and scan the questions by topic The descriptor line in the solution listing has the question topic, difficulty, answer, notation for whether the problem is new or revised, and worked-out problem solution The instructor can select a set of potential exam questions in this manner and then examine each question individually to construct the actual exam v Revised Structure of the Test Bank We have had a test bank for many years Over time, as we developed new questions, we added them to the bottom of the set for the appropriate chapter This resulted in a random ordering of questions with regard to both topic and level of difficulty This made it difficult for us to insure that the Test Bank contained a balanced set of questions, and it also made it difficult for instructors to construct a balanced exam To make the Test Bank easier to use, we structured the questions within each chapter as follows: I MULTIPLE CHOICE: CONCEPTUAL Easy Medium Tough II MULTIPLE CHOICE: PROBLEMS Easy Medium Tough Multiple Part III WEB APPENDIX SECTION Easy Medium Tough Multiple Part Within each of these categories, we grouped the questions by topic In addition, the question descriptor line found above each question includes the difficulty level, as well as the letters “N” and “R” to indicate new and revised questions to the Test Bank The difficulty level is preceded by the label “DIFF:.” Difficulty Level The questions and problems range from quite easy to very difficult Some are easy to categorize, but others are not what might be a hard problem to one set of students might be easy to another set These differences arise due to differences in students’ innate abilities and backgrounds, to the time an instructor spends on a topic, and, for some of the numerical problems, on the type of calculator a student has Also, if pre-exam review sessions are held, and a particular type of problem is covered, then that will lower the difficulty level for other problems of that type Still, the difficulty groupings will help instructors select a reasonable mix of questions for a given quiz or exam Time Requirements and Financial Calculators We considered indicating approximately how long it would take to work the various problems, but due to the differences noted in the previous sections, this would more harm than good Instructors should, therefore, look at the questions and the worked-out solutions to the numerical problems and decide for themselves how long it will take their students to work them Generally, the harder problems will require the most time vi We always make up an exam, have several student assistants take it, and then adjust it until it seems feasible for a two-hour exam Further, we give exams at night, scheduled for two hours, and generally make them terminate on schedule However, if it is obvious early on that the exam is too long even for the best of the students, we may extend the time for an extra 15 or 20 minutes We make it clear to the class, though, that these exams are like the SAT or GMAT exams in that some students will not be able to complete all the questions within the allotted time The type of calculator used is extremely important in determining the time required to work time value of money, bond valuation, stock valuation, and capital budgeting problems At Florida, we made a College-wide decision to require students to have and to learn to use financial calculators, and exams reflect that situation it would be virtually impossible for anyone to pass the type of exams we use without a financial calculator With the cost of a relatively powerful calculator down to about $30, and with their use so pervasive in business, we concluded that the time had come to force business students to learn how to use them At any rate, it is important for instructors to think about what type of calculator his or her students will be using when making up exams Debugging the Questions The questions/problems in the Test Bank have all been used in class, and they are as unambiguous as such questions can be Further, they are generic in the sense that they can be answered on the basis of material found in the text rather than instructor-specific information Obviously, we took care to insure that they are accurate, and that the correct answer is listed in the set of possible answers Indeed, the “quality control” procedures were more strenuous for the Test Bank than for the text per se Still, because of the severe consequences of giving an exam that contains errors, we would never give an exam without first taking it, and in a large class without having several teaching assistants also take it, both to check for errors and to get an idea of how long it will take Computerized Test Banks The Test Bank comes in three versions: (1) the paper copy which you are reading, (2) diskettes which contain South-Western’s regular computerized test bank (ExamView), and (3) diskettes formatted in Microsoft Word® The third option was originally added because we had word processing files and we personally, along with a number of other instructors who were familiar with the word processing programs, felt that it was easier to work with these files than with SouthWestern’s regular computerized test bank Now, though, the South-Western ExamView test bank has been improved to the point where even people who are familiar with Microsoft Word® might want to invest the time required to learn the ExamView system Adopters may obtain the regular computerized test bank or the Microsoft Word® version by contacting their local South-Western sales representative vii To use ExamView, one must install it on his or her computer and then read through the documentation provided Like all sophisticated software, this requires a couple of hours However, if you plan to use the Test Bank and will be making up a number of exams, the product is worth the time invested it really is good If you are familiar with Microsoft Word® and not want to invest the time to learn how to use ExamView, then we would recommend the Microsoft Word® files Most departmental secretaries can use Microsoft Word® or some comparable system, and with our files the physical construction of exams is quite easy First, scan through the paper copy and select what you regard as the proper mix of questions and problems Make a list of them, by number Then retrieve (or delegate the job to the departmental secretary) both the Header.doc file and the file for the first chapter covered The Header.doc file contains the exam heading and exam instructions that can be edited, along with the appropriate font specifications Questions copied from the original test bank diskette should be pasted onto the Header.doc file With the appropriate chapter file retrieved, scroll down to the first question to be taken from that chapter, copy the question (do not cut the question as this will alter the original test bank file) except for the first line containing the answer, open the Header.doc file and paste the question to the Header.doc file, switch back to the original test bank file, screen to the second selected question, and so forth The font may change when the question is pasted into the Header.doc file This can be easily corrected by selecting “Replace” from the “Edit” pull-down menu, clicking on the “Format” button at the bottom of the “Dialog” box and clicking on “Font” Select “Times New Roman” as the “Find Font”, then click “OK” Click in the “Replace With” field, then click the “Format” button again Click “Font”, then select “Courier New” and “Size 10” before clicking “OK” Then click “Find Next” button When the text is highlighted click “Replace All” Word makes the change for all text in “Times New Roman.” We generally use 20 questions on an exam, and it takes us about 30 minutes to construct an exam once the questions have been selected It’s even easier to give the list of questions and the diskette to the departmental secretary; he or she can then get it done in about 15 minutes We realize that Microsoft Word® is not the only word processing system Although we are at this point unable to offer the diskette in other formats, it is easy to translate from one system to another, at least for most systems Student Preparation for a Test Bank Exam The test bank questions and problems are different the end of the text chapters, and if a student goes the Test Bank, he or she will be thrown for a loop for a test bank exam, and working end-of-chapter preparation viii from most of the problems at cold into an exam taken from Students need to be prepared problems is not sufficient The difficulty is that the end-of-chapter problems are designed primarily to help students learn the material, including how it is used in practice, whereas the test bank questions are designed to test how much knowledge the students have attained Many of the test bank questions are convoluted, and this forces students to work backwards, from what would normally be the answer to what would normally be an input Also, students not have severe time constraints when they work end-of-chapter problems, and this makes the test bank questions seem even more difficult We believe that all conscientious students should be able to work all of the end-of-chapter problems without help, but we like for our exams to challenge even the best of our students, and problems that are challenging to the top students turn out to be virtually impossible, in view of the time constraints, for weaker or even average students With all this in mind, we put a number of test-bank-type questions into the text (in the end-of-chapter problems, identified as exam-type problems), into the Study Guide, and into Blueprints Our students tell us that working through the Study Guide is particularly useful in getting ready for the exams Also, we always put some of our old exams in a “Course Pack” which students can purchase from an off-campus copy center, so our students can get a good idea of what the exams will be like Finally, our TAs go over test-type questions in pre-exam review sessions The Examination Process At Florida we give two 2-hour midterms plus a 2-hour final exam We have approximately 1,000 students per semester, and they all take a common exam We have tried using a few essay questions or regular problems, but we concluded that it is too much work to grade them, so we now use only machine-gradable multiplechoice exams Our students must sit close together during the exam, so cheating is a potential problem We control it by making up four exams each one on different color paper The only difference in the exams is that the questions are arranged in different order (This is easy to with the Microsoft Word® version as the test questions have been numbered using endnotes, so questions can be rearranged within the file and will renumber automatically Just remember to save the file with the renumbered questions as a separate new file.) Exams are passed out so that no student sits next to anyone with the same color exam Students are allowed to use formula sheets (taken from the back of the textbook), calculators, compound interest tables, and scratch paper Also, we allow students to construct an 8½ by 11 inch, front-and-back, “cheat sheet” with anything they want to include (Students consistently tell us that they rarely use the cheat sheets during the exam, but they learn a lot making them up, and having them reduces stress before and during exams.) Students must bring picture ID cards, and a number of TAs proctor the exams With this process, we believe (and our students share our perception) that virtually no cheating occurs (Some other large courses have had terrible problems, even to the extent of having had to throw out and redo an exam.) We use the same process when we teach a class with 25 to 30 students, except for the IDs and student proctors ix We use 10 conceptual multiple-choice questions and numerical problems on each exam We not use true/false questions because they can be a problem-guessing can play too large a role in determining grades However, if you want to use true/false questions, the multiple-choice conceptual statements can be broken down to make five true/false questions Other Uses of the Test Bank The primary use of the Test Bank is to make up objective exams for use in large classes where it is simply not feasible to grade papers in the traditional way However, the questions can be used for several other purposes: To make up a regular exam It is easy to use the conceptual questions and numerical problems to make up a “regular” exam just delete the set of answers and ask for an essay answer or worked-out problem solution For additional problems We draw from the Test Bank to make up problems that our TAs use in their pre-exam review sessions One could also use them for make-up exams, extra-credit work, and the like To create new multiple-choice test questions The computerized versions of the Test Bank make it easy to create new problems and questions For example, statements in different multiple-choice questions can be shuffled to create new questions Similarly, data in the problems, such as years to maturity, coupon rates, growth rates, betas, et cetera, can be changed, and wording can be altered, to expand the Test Bank to an almost unlimited size Grade Curving and the Computerized Grading System One problem that we have encountered involves situations where one exam turns out to be more difficult than another This becomes a problem if some students are excused from one of the exams, or if we use make-up exams that turn out to be more or less difficult than the regular exams (This problem is not restricted to courses where one uses the Test Bank, and it is especially severe if one permits students to drop the lowest grade in a series of exams.) To solve this problem, we developed a Microsoft Excel® model that automatically curves all of the grades on each exam and adjusts them to a common mean and standard deviation Thus, a student’s grade will not be helped or hurt if he or she happens to have been excused from an exam that turns out to be easier or harder than the others All of this makes the final grades more accurately reflect students’ knowledge, and it improves students’ perceptions of the fairness of the grading system The Excel® model is also useful for three other purposes: (1) It automatically averages students’ grades, and it produces a weighted average (we generally weight the midterms 30 percent each and the final 40 percent) (2) We can specify a mean grade on each exam such that the grade distribution will produce any specified GPA For example, if we want to end up with a 2.7 GPA, the model will produce that result This is useful in the 1,000-student course, but it is also useful in our advanced courses, where there are multiple sections of a given course and we would prefer that students’ grades not be too dependent on x which instructor they were assigned to (3) The program makes it easy to sort by students’ grades to obtain a listing of students by rank order, and to sort by social security number for purposes of posting grades without names Since other instructors may find the model useful, we have included it in the test bank diskette, under the filename GRADES.xls More detail and instructions on the use of the model are given following this Preface Acknowledgments We would like to thank Professors Andy McCollough, Craig Tapley, Lou Gapenski, Bob Radcliffe, and Carolyn Takeda for permitting us to use some of their old exam questions, and also for giving us many insights into the whole examination process We also appreciate the work done by a whole host of TAs and graduate students, over many years, in helping to develop and debug the questions/problems Dana Aberwald Clark did her usual good job of riding herd on all of us, and making sure the Test Bank was completed on time and was consistent with the text of Fundamentals Finally, Susan Whitman took care of the massive typing job; her care and dedication is much appreciated Correspondence We would very much appreciate hearing from test bank users what difficulties are you having, and what can we to improve it? If you have any complaints or suggestions, please address your correspondence to Joel Houston at the address below Eugene F Brigham Joel F Houston 4723 NW 53rd Ave., Suite A Gainesville, FL 32606 (352)392-7546 e-mail address: fundamentals@joelhouston.com January 2003 xi Microsoft Excel® GRADE RECORD Several of us at Florida use a Microsoft Excel® program to record and adjust students’ grades The program is saved on the test bank diskette under the filename GRADES.xls, and a printout is given in Table below Here are some notes on why we like the program, and some hints on how to use it One reason for using a spreadsheet gradesheet is the ease with which one can calculate students’ final grades on a weighted-average basis, adjust raw exam scores so as to produce a uniform average across exams, sort so as to obtain a rank ordering of students’ standings in the class, and so on Spreadsheets are great for such things For simplicity, the model given on the diskette and shown in Table is for only students and exams It would be easy enough to add rows and columns to accommodate any number of students and exams, to include quizzes, homework, term papers, and so on, and to base the final weighted grades on all this work Care must, of course, be taken to modify the formulas when additional columns are added Also, in practice, we use named ranges, but we used direct cell references in the model given on the diskette because this facilitates understanding Consider next the matter of getting a weighted average, say giving 30 percent of the weight to each of two midterms and 40 percent to the final exam It is time consuming to make this calculation by hand for a large class, but almost trivial using a spreadsheet More complicated schemes can be introduced, such as disregarding the lowest exam score and giving more weight to the remaining ones, and the like The sample spreadsheet given in Table calculates the final weighted average in Column J, and it is programmed to give equal weights, but by adjusting the formula in J5 and copying to the range J6.J9, one can produce any weighting scheme There is an advantage to having uniform averages across exams, primarily in the event that some students miss exams, take makeups, or are allowed to exempt out of an exam, but also because students get traumatized if the exam turns out to be relatively difficult and the grades are consequently low, or overly confident if the grades are unusually high We can tell students that the final grades will be curved, but they are still confused and upset We reduce this problem by using a formula that adjusts all exams to a common mean The formula is shown in “spreadsheet language” in the lower part of Table 1, but in words, here is what it does: Adj Grade = (Raw grade - Raw average)(Forced SD/Raw SD) + Forced average We input the forced average grade into Cell L18 and the forced standard deviation (SD) into Cell L19 Those values are then used in the formula in Column B (and above) to calculate each student’s Adjusted Grade The average of the Adjusted Grades, for the exam, is equal to the forced mean, and the final standard deviation is equal to the forced standard deviation xii At Florida we not force Grade Point Averages for a class to equal any particular number, but GPAs for different courses are published, and many of us try to insure that the grades in our own courses are not too far out of line with those in other courses, and especially with other sections of the same course Therefore, we built a feature into the Excel® model which can be used to help produce a student letter grade distribution which produces a “reasonable” class GPA The same process also produces a situation where 90 and up = A, 80-89 = B, 70-79 = C, 60-69 = D, and below 60 = F (or any other setup, including the use of + and - grades) This subroutine involves formulas in Columns L and M which look up a student’s points as shown in Column J in the Lookup table contained in the range A16.C20 and then assign the student a Grade Point and a letter grade The model also shows (in Cell N15) the class GPA If the class GPA is too high or too low given our target reference range, we merely change the forced average grade shown in L18, and the entire worksheet is instantly recalculated.1 We change the value in Cell L18 until we get a “reasonable” class GPA With only students, as in the sample model, it is difficult to produce a precise target GPA, but with 20 or more students, this is not difficult When we use the model, we build it up slowly over the term, having just one data set after the first exam, two after the second, and so on Also, we sort on the total points and use the printout to show the ranked order to students (identified by SSN) when they ask about where they stand in the class This is easy, and it lets students know their standing with a minimum of explanation Students understand and approve of our grading system The cost to the instructor is low, and the value to the students is high If you have easy access to a spreadsheet program and are familiar with it, we recommend that you consider using our program In actual use, we set the worksheet on manual recalculation to speed up data entry xiii Table Microsoft Excel® GRADESHEET MODEL NOTES: When copying the formula for the adjusted grades to Column E after the 2nd midterm, it is necessary to change all C’s to F’s, and then to I’s when copying the formula into Column H Copy B11.C13 into E11.F13 and then to H11.I13 after the 2nd midterm and the final exam There is nothing magic about the forced SD; rather arbitrarily, we decided to use 15.0 That tends to put 68 percent of the class within the range 65.0 - 95.0 when combined with an 80 average We work toward a target class GPA as shown in N15 We put the pointer on L18 and adjust the forced average until we obtain the GPA we want The procedure works well with a large class xiv ... different the end of the text chapters, and if a student goes the Test Bank, he or she will be thrown for a loop for a test bank exam, and working end -of- chapter preparation viii from most of the problems... select a set of potential exam questions in this manner and then examine each question individually to construct the actual exam v Revised Structure of the Test Bank We have had a test bank for many... PREFACE This Test Bank is designed for use with Fundamentals of Financial Management, Tenth Edition Major Changes in this Edition At the University of Florida, where the introductory finance course