Finance for Decision Making
Exam Bank
Course Introduction
Finance for Decision Making introduces students to the fundamental financial concepts and analytical tools essential for effective managerial decision-making in organizations. The course covers key topics such as financial statement analysis, time value of money, risk and return, cost of capital, and capital budgeting. Students learn how to interpret financial information, assess investment opportunities, evaluate financing options, and make informed financial decisions that drive business value. Through case studies and real-world examples, the course emphasizes the integration of finance with overall business strategy and prepares students to make sound financial choices in complex, dynamic environments.
Recommended Textbook
Corporate Finance Core Principles and Applications 3rd Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following statements concerning a sole proprietorship is correct?
A)A sole proprietorship is often structured as a limited liability company.
B)The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
C)The owners of a sole proprietorship share profits as established by the partnership agreement.
D)The profits of a sole proprietorship are taxed twice.
E)A sole proprietorship is the least common form of business ownership.
Answer: B
Q2) The decisions made by financial managers should all be ones which increase the: A)size of the firm.
B)growth rate of the firm.
C)marketability of the managers.
D)market value of the existing owners' equity.
E)financial distress of the firm.
Answer: D
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3
Chapter 2: Financial Statements Cash Flow
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Q1) A firm starts its year with a positive net working capital.During the year,the firm acquires more short-term debt than it does short-term assets.This means that:
A)the ending net working capital will be negative.
B)both accounts receivable and inventory decreased during the year.
C)the beginning current assets were less than the beginning current liabilities.
D)accounts payable increased and inventory decreased during the year.
E)the ending net working capital can be positive, negative, or equal to zero.
Answer: E
Q2) The long-term debts of a firm are liabilities:
A)owed to the firm's shareholders.
B)the firm expects to incur within the next 12 months.
C)owed to the firm's suppliers.
D)that come due within the next 12 months.
E)that do not come due for at least 12 months.
Answer: E
Q3) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) The sustainable growth rate will be equivalent to the internal growth rate when:
A)net income is greater than zero.
B)the plowback ratio is positive but less than 1.
C)the growth rate is positive.
D)a firm has a debt-equity ratio exactly equal to 1.
E)a firm has no debt.
Answer: E
Q2) Katelyn's Kites has net income of $240 and total equity of $2,000.The debt-equity ratio is 1.0 and the plowback ratio is 40%.What is the internal growth rate?
A)2.46%
B)3.00%
C)4.92%
D)5.88%
E)6.00%
Answer: A
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Mr.Miser loans money at an annual rate of 23 percent.Interest is compounded daily.What is the actual rate Mr.Miser is charging on his loans?
A)24.97%
B)25.08%
C)25.21%
D)25.36%
E)25.85%
Q2) The great,great grandparents of one of your classmates sold their factory to the government 110 years ago for $125,000.If these proceeds had been invested at 6%,how much would this legacy be worth today? Assume annual compounding.
A)$50,936,000.00
B)$61,086,000.00
C)$70,467,131.54
D)$75,954,794.34
E)$84,254,159.44
Q3) What is the different between an ordinary annuity and an annuity due? Which occurs more in practice? Give a common example of both.
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6
Chapter 5: Interest Rate and Bond Valuation
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Q1) Zeta Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 5% and the bond matures in 8 years?
A)$630.69
B)$676.84
C)$1,000.00
D)$1,050.00
E)This problem cannot be worked without the annual interest payments provided.
Q2) All else constant,a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
A)a discount; higher than B)a premium; equal to C)at par; higher than D)at par; less than E)a premium; higher than
Q3) Why do corporations issue 100-year bonds,knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?
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Chapter 6: Stock Valuation
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Sample Questions
Q1) A member of the New York Stock Exchange who executes orders for commission brokers on a fee basis is a:
A)floor trader.
B)dealer.
C)specialist.
D)floor broker.
E)floor agent.
Q2) Latcher's Inc.is a relatively new firm that is still in a period of rapid development.The company plans on retaining all of its earnings for the next six years.Seven years from now,the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3% annually thereafter.To value this stock as of today,you would most likely determine the value of the stock _____ years from today before determining today's value.
A)4
B)5
C)6
D)7
E)8
Q3) What are the components of the required rate of return on a share of stock?
Briefly explain each component.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) Which one of the following statements concerning net present value (NPV)is correct?
A)An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B)An investment should be accepted only if the NPV is equal to the initial cash flow.
C)An investment should be accepted if the NPV is positive and rejected if it is negative.
D)An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.
E)Any project that has positive cash flows for every time period after the initial investment should be accepted.
Q2) Based on the net present value of ____ for this project,you should _____ the project.
A)-$2,405; reject
B)-$3,958; reject
C)$13,454; accept
D)$14,029; accept
E)$17,796; accept
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) What is the value of the depreciation tax shield in year 2 of the project?
A)$68,000
B)$74,000
C)$80,000
D)$200,000
E)$1,000,000
Q2) What is the recovery amount attributable to net working capital at the end of the project?
A)$55,200
B)$81,600
C)$159,600
D)$240,000
E)$424,800
Q3) Tax shield refers to a reduction in taxes created by:
A)noncash expenses.
B)an increase in interest expense.
C)a reduction in sales.
D)a project's incremental expenses.
E)opportunity costs.
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) When should a firm consider using decision tree analysis in capital budgeting?
Q2) Which one of the following is most likely a variable cost?
A)Management salaries
B)Property taxes
C)Direct labor costs
D)Property insurance
E)Office rent
Q3) What is the contribution margin for a sensitivity analysis using a variable cost per unit of $8?
A)$3
B)$4
C)$5
D)$6
E)$7
Q4) Conducting scenario analysis helps managers see the:
A)impact of an individual variable on the outcome of a project.
B)potential range of outcomes from a proposed project.
C)changes in long-term debt over the course of a proposed project.
D)possible range of market prices for their stock over the life of a project.
E)distribution of funds for capital projects under conditions of hard rationing.
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Chapter 10: Risk and Return Lessons From Market History
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Sample Questions
Q1) A stock had returns of 11%,1%,9%,15%,and -6% for the past five years.Based on these returns,what is the approximate probability that this stock will earn at least 23% in any one given year?
A)0.5%
B)1.0%
C)2.5%
D)5.0%
E)16.0%
Q2) The average annual return on small company stocks was about _______% points greater than the average annual return on large-company stocks over the period of 1926 to 2009.
A)2
B)4
C)5
D)6
E)9
Q3) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
Q4) What is the difference between arithmetic average and geometric mean? Is one better than the other to use in financial analysis?
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Chapter 11: Return and Risk: The Capital Asset Pricing Model
Capm
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Sample Questions
Q1) The efficient set of portfolios
A)contains the portfolio combinations with the highest return for a given level of risk.
B)contains the portfolio combinations with the lowest risk for a given level of return.
C)is the lowest overall risk portfolio.
D)Both A and B
E)Both A and C.
Q2) The risk premium for an individual security is computed by:
A)adding the risk-free rate to the security's expected return.
B)multiplying the security's beta by the risk-free rate of return.
C)multiplying the security's beta by the market risk premium.
D)dividing the market risk premium by the beta of the security.
E)dividing the market risk premium by the quantity (1 - beta).
Q3) Risk that affects at most a small number of assets is called _____ risk.
A)portfolio
B)undiversifiable
C)market
D)unsystematic
E)total
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Chapter 12: Risk, Cost of Capital, and Capital Budgeting
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Q1) The formula for calculating beta is given by dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.
A)variance; covariance
B)covariance; variance
C)standard deviation; variance
D)expected return; variance
E)expected return; covariance
Q2) A firm with high operating leverage has:
A)low fixed costs in its production process.
B)high variable costs in its production process.
C)high fixed costs in its production process.
D)high price per unit.
E)low price per unit.
Q3) The slope of the characteristic line is the estimated:
A)intercept.
B)beta.
C)unsystematic risk.
D)market variance.
E)market risk premium.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) The thought that investors might be too slow in adjusting their beliefs to new information is called:
A)liberalism.
B)conservatism.
C)representativeness.
D)weak form efficiency.
E)None of the above.
Q2) Efficient capital markets are financial markets
A)in which there is no excess profit from using available information.
B)in which current market prices reflect the present value of securities.
C)in which current market prices reflect available information.
D)All of the above.
E)None of the above.
Q3) Market efficiency says:
A)managers cannot boost stock prices through creative accounting.
B)managers may profitably speculate in foreign currency.
C)a good financial manager can time stock sales.
D)prices may not reflect underlying value.
E)None of the above.
Q4) Define the three forms of market efficiency.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) MM Proposition I without taxes is used to illustrate:
A)the value of an unlevered firm equals that of a levered firm.
B)that one capital structure is as good as another.
C)leverage does not affect the value of the firm.
D)capital structure changes have no effect on stockholder's welfare.
E)All of the above.
Q2) In each of the theories of capital structure the cost of equity rises as the amount of debt increases.So why don't financial managers use as little debt as possible to keep the cost of equity down?
After all,isn't the goal of the firm to maximize share value and minimize shareholder costs?
Q3) The proposition that the value of a levered firm is equal to the value of an unlevered firm is known as:
A)static theory proposition.
B)MM Proposition I with no tax.
C)MM Proposition II with no tax.
D)MM Proposition I with tax.
E)MM Proposition II with tax.
Q4) Explain homemade leverage and why it matters.
Q5) Verbally explain MM Proposition I without taxes.
Page 16
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Given the following information,leverage will add how much value to the unlevered firm per dollar of debt?
Corporate tax rate: 34%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from stocks: 0%
A)$0.175
B)$0.472
C)$0.528
D)$0.825
E)None of the above.
Q2) Covenants restricting the use of leasing and additional borrowings primarily protect:
A)the equityholders from added risk of default.
B)the debtholders from the transfer of assets.
C)the debtholders from added risk of dilution of their claims.
D)the management from having to pay agency costs.
E)None of the above.
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Chapter 16: Dividend and Other Payouts
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Sample Questions
Q1) Priscilla owns 500 shares of Delta stock.It is January 1,2010,the company recently issued a statement that it will pay a $1.00 per share dividend on December 31,2010,and a $.50 per share dividend on December 31,2011.Priscilla does not want any dividend this year but does want as much dividend income as possible next year.Her required return on this stock is 10%.Ignoring taxes,what will Priscilla's homemade dividend per share be in 2011?
A)$0
B)$.50
C)$1.50
D)$1.60
E)$1.68
Q2) The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.
A)ex-rights
B)ex-dividend
C)record
D)payment
E)declaration
Q3) What is the life cycle theory of cash distributions and what does it mean?
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Page 18
Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) The Black-Scholes option pricing model is dependent on which five parameters?
A)Stock price, exercise price, risk free rate, probability, and time to maturity.
B)Stock price, risk free rate, probability, time to maturity, and variance.
C)Stock price, risk free rate, probability, variance and exercise price.
D)Stock price, exercise price, risk free rate, variance and time to maturity.
E)Exercise price, probability, stock price, variance and time to maturity.
Q2) Martha B's has total assets of $1,750.These assets are expected to increase in value to either $1,800 or $2,400 by next year.The company has a pure discount bond outstanding with a face value of $2,000.This bond matures in one year.Currently,U.S.Treasury bills are yielding 6 percent.What is the value of the equity in this firm?
A)$16.98
B)$34.59
C)$36.67
D)$37.08
E)$51.89
Q3) Distinguish the difference between American and European options.All else equal,which has more value?
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19
Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) If your accounts receivable period is 30 days,you will collect payment for your _____ sales during the second quarter of a calendar year.
A)January and February
B)January, February and March
C)February and March
D)February, March and April
E)March, April and May
Q2) Net working capital is defined as:
A)the current assets in a business.
B)the difference between current assets and current liabilities.
C)the present value of short-term cash flows.
D)the difference between all assets and liabilities.
E)None of the above.
Q3) The inventory period for 2008 for StarrKnight Corporation is (use average inventory):
A)60.73 days
B)62.18 days
C)115.14 days
D)119.28 days
E)123.31 days
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) Which one of the following specifies the length of time that must pass after an IPO before insiders are permitted to sell their shares?
A)Lockup period
B)Quiet period
C)Comment period
D)Green Shoe period
E)Rights offer period
Q2) What is the legal document called that is provided to potential investors and describes a new security offering?
A)Prospectus
B)Security agreement
C)Formal filing
D)Registration statement
E)Public statement
Q3) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
Q4) What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) The current spot rate is C$1.362 and the one-year forward rate is C$1.371.The nominal risk-free rate in Canada is 6% while it is 3.5% in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.
A)$.0018
B)$.0045
C)$.0120
D)$.0180
E)$.0240
Q2) A foreign bond issued in Japan and denominated in yen is called a(n):
A)American Depository Receipt.
B)European Currency Unit.
C)swap bond.
D)Samurai bond.
E)Eurobond.
Q3) What is required for absolute purchasing power parity to hold?
Do you think absolute PPP would hold in the case where a computer retailer in the U.S.sits directly across the border from a computer retailer in Canada? How about Houston,Texas,and Winnipeg,Manitoba?
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