Finance for Decision Making Review Questions

Course Introduction

Finance for Decision Making introduces students to fundamental financial principles and tools that support effective decision-making within organizations. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk assessment, and the cost of capital. Emphasis is placed on applying quantitative techniques to evaluate investment opportunities, manage resources, and make strategic business choices. Through real-world case studies and practical exercises, students develop the analytical skills needed to interpret financial information, assess financial health, and make informed decisions that contribute to organizational success.

Recommended Textbook

Fundamentals of Corporate Finance 11thEdition by Stephen Ross

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27 Chapters

2571 Verified Questions

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Page 2

Chapter 1: Introduction to Corporate Finance

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Sample Questions

Q1) Which one of the following terms is defined as the management of a firm's long-term investments?

A)working capital management

B)financial allocation

C)agency cost analysis

D)capital budgeting

E)capital structure

Answer: D

Q2) Which one of the following parties has ultimate control of a corporation?

A)chairman of the Board

B)board of directors

C)chief executive officer

D)chief operating office

E)shareholders

Answer: E

Q3) Describe the key advantages associated with the corporate form of organization.

Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.

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Page 3

Chapter 2: Financial Statements, Taxes, and Cash Flow

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Sample Questions

Q1) Winston Industries had sales of $843,800 and costs of $609,900.The firm paid $38,200 in interest and $18,000 in dividends.It also increased retained earnings by $62,138 for the year.The depreciation was $76,400.What is the average tax rate?

A)32.83 percent

B)33.33 percent

C)38.17 percent

D)43.39 percent

E)48.87 percent

Answer: A

Q2) The higher the degree of financial leverage employed by a firm,the:

A)higher the probability that the firm will encounter financial distress.

B)lower the amount of debt incurred.

C)less debt a firm has per dollar of total assets.

D)higher the number of outstanding shares of stock.

E)lower the balance in accounts payable.

Answer: A

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Chapter 3: Working With Financial Statements

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Sample Questions

Q1) What value does the PEG ratio provide to financial analysts?

Answer: The PEG ratio divides the PE ratio by the expected future earnings growth rate (The growth rate is multiplied by 100).A high PEG value tends to indicate that the firm's PE ratio,and thus the stock price,is too high relative to the expected growth rate of the firm's earnings.This is particularly true when a firm's PEG and PE ratios are noticeably greater than those of its peers.

Q2) The U.S.government coding system that classifies a firm by the nature of its business operations is known as the:

A)NASDAQ 100.

B)Standard & Poor's 500.

C)Standard Industrial Classification code.

D)Governmental ID code.

E)Government Engineered Coding System.

Answer: C

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Chapter 4: Long-Term Financial Planning and Growth

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Sample Questions

Q1) A Procrustes approach to financial planning is based on:

A)a policy of producing a financial plan once every five years.

B)developing a plan around the goals of senior managers.

C)a proactive approach to the economic outlook.

D)a flexible capital budget.

E)a flexible capital structure.

Q2) Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent of the firm's capacity.What is the full capacity level of sales?

A)$31,755

B)$36,250

C)$48,667

D)$51,333

E)$54,500

Q3) The external financing need:

A)will limit growth if unfunded.

B)is unaffected by the dividend payout ratio.

C)must be funded by long-term debt.

D)ignores any changes in retained earnings.

E)considers only the required increase in fixed assets.

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Page 6

Chapter 5: Introduction to Valuation: The Time Value of Money

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Sample Questions

Q1) According to the Rule of 72,you can do which one of the following?

A)double your money in five years at 7.2 percent interest

B)double your money in 7.2 years at 8 percent interest

C)double your money in 5 years at 14.4 percent interest

D)triple your money in 7.2 years at 5 percent interest

E)triple your money at 10 percent interest in 7.2 years

Q2) Your grandmother has promised to give you $5,000 when you graduate from college.She is expecting you to graduate two years from now.What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

A)remains constant

B)increases

C)decreases

D)becomes negative

E)cannot be determined from the information provided

Q3) You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

Page 7

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Chapter 6: Discounted Cash Flow Valuation

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Sample Questions

Q1) Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

A)annual

B)semi-annual

C)monthly

D)daily

E)continuous

Q2) A wealthy benefactor just donated some money to the local college.This gift was established to provide scholarships for worthy students.The first scholarships will be granted one year from now for a total of $35,000.Annually thereafter,the scholarship amount will be increased by 5.5 percent to help offset the effects of inflation.The scholarship fund will last indefinitely.What is the value of this gift today at a discount rate of 9 percent?

A)$37,500

B)$350,000

C)$800,000

D)$1,000,000

E)$1,050,750

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Chapter 7: Interest Rates and Bond Valuation

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Sample Questions

Q1) Currently,the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries.The 11.6 percent is referred to as which one of the following?

A)coupon rate

B)face rate

C)call rate

D)yield to maturity

E)interest rate

Q2) A 16-year,4.5 percent coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

A)2.14 percent decrease

B)1.97 percent decrease

C)0.21 percent increase

D)1.97 percent increase

E)2.14 percent increase

Q3) Describe the relationships that exist between the coupon rate,the yield to maturity,and the current yield for both a discount bond and a premium bond.

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Chapter 8: Stock Valuation

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Sample Questions

Q1) A securities market primarily comprised of dealers who buy and sell for their own inventories is referred to which type of market?

A)auction

B)private

C)over-the-counter

D)regional

E)electronic network

Q2) Jefferson Mills just paid a dividend of $1.56 per share on its stock.The dividends are expected to grow at a constant rate of 8 percent per year,indefinitely.What will the price of this stock be in 7 years if investors require a 15 percent rate of return?

A)$28.18

B)$32.04

C)$37.46

D)$41.25

E)$43.33

Q3) Explain the primary change that occurred in the structure of the NYSE in 2006 and how that change affected the exchange members.

Q4) What are the primary differences and similarities between NASDAQ and the NYSE?

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Chapter 9: Net Present Value and Other Investment Criteria

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Sample Questions

Q1) There are two distinct discount rates at which a particular project will have a zero net present value.In this situation,the project is said to:

A)have two net present value profiles.

B)have operational ambiguity.

C)create a mutually exclusive investment decision.

D)produce multiple economies of scale.

E)have multiple rates of return.

Q2) The internal rate of return is:

A)the discount rate that makes the net present value of a project equal to the initial cash outlay.

B)equivalent to the discount rate that makes the net present value equal to one.

C)tedious to compute without the use of either a financial calculator or a computer.

D)highly dependent upon the current interest rates offered in the marketplace.

E)a better methodology than net present value when dealing with unconventional cash flows.

Q3) How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

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Chapter 10: Making Capital Investment Decisions

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Sample Questions

Q1) The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

A)sunk

B)total

C)variable

D)incremental

E)fixed

Q2) When using the equivalent annual cost as a basis for deciding which equipment should be purchased,the equipment under consideration must fit which two of the following criteria?

I.differing productive lives

II.differing manufacturers

III.required replacement at end of economic life

IV.differing initial cost

A)I and II

B)I and III

C)I and IV

D)II and IIII

E)II and IV

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Chapter 11: Project Analysis and Evaluation

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Sample Questions

Q1) A project has a projected IRR of negative 100 percent.Which one of the following statements must also be true concerning this project?

A)The discounted payback period equals the life of the project.

B)The operating cash flow is positive and equal to the depreciation.

C)The net present value of the project is negative and equal to the initial investment.

D)The payback period is exactly equal to the life of the project.

E)The net present value of the project is equal to zero.

Q2) Scenario analysis is defined as the:

A)determination of the initial cash outlay required to implement a project.

B)determination of changes in NPV estimates when what-if questions are posed.

C)isolation of the effect that a single variable has on the NPV of a project.

D)separation of a project's sunk costs from its opportunity costs.

E)analysis of the effects that a project's terminal cash flows has on the project's NPV.

Q3) What are the key features of the accounting,cash,and financial break-even points?

Q4) What is operating leverage and why is it important in the analysis of capital expenditure projects?

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Page 13

Chapter 12: Some Lessons From Capital Market History

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Sample Questions

Q1) Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?

I.insiders knew the information prior to the announcement II.investors need time to digest the information prior to reacting III.the information has no bearing on the value of the firm IV.the information was anticipated

A)I and II only

B)I and III only

C)II and III only

D)II and IV only

E)III and IV only

Q2) If you excel in analyzing the future outlook of firms,you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

A)weak

B)semiweak

C)semistrong

D)strong

E)perfect

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Page 14

Chapter 13: Return, Risk, and the Security Market Line

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Sample Questions

Q1) The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent.The risk-free rate of return is 3.7 percent.What is the expected market risk premium?

A)7.02 percent

B)7.90 percent

C)10.63 percent

D)11.22 percent

E)11.60 percent

Q2) Which of the following statements are correct concerning diversifiable risks?

I.Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.

II.There is no reward for accepting diversifiable risks.

III.Diversifiable risks are generally associated with an individual firm or industry. IV.Beta measures diversifiable risk.

A)I and III only

B)II and IV only

C)I and IV only

D)I, II and III only

E)I, II, III, and IV

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Chapter 14: Cost of Capital

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Sample Questions

Q1) Wilderness Adventures specializes in back-country tours and resort management.Travel Excitement specializes in making travel reservations and promoting vacation travel.Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent.Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails.The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate.Which firm or firms,if either,should accept this project?

A)Wilderness Adventures only

B)Travel Excitement only

C)both Wilderness Adventures and Travel Excitement

D)neither Wilderness Adventures nor Travel Excitement

E)cannot be determined without further information

Q2) Which one of the following is the primary determinant of a firm's cost of capital?

A)debt-equity ratio

B)applicable tax rate

C)cost of equity

D)cost of debt

E)use of the funds

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Page 16

Chapter 15: Raising Capital

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Sample Questions

Q1) What is a seasoned equity offering?

A)an offering of shares by shareholders for repurchase by the issuer

B)shares of stock that have been recommended for purchase by the SEC

C)equity securities held by a firm's founder that are being offered for sale to the general public

D)sale of newly issued equity shares by a firm that is currently publicly owned

E)a set number of equity shares that are issued and offered to the public annually

Q2) What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

A)prospectus

B)red herring

C)indenture

D)public disclosure statement

E)registration statement

Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.

Q4) Explain why there is a tendency for IPOs to be underpriced.

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Chapter 16: Financial Leverage and Capital Structure Policy

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Sample Questions

Q1) The Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent.The company has $22,000 in debt that is selling at par value.The levered value of the firm is $41,000 and the tax rate is 34 percent.What is the pre-tax cost of debt?

A)4.73 percent

B)6.18 percent

C)6.59 percent

D)7.22 percent

E)9.92 percent

Q2) Jemisen's has expected earnings before interest and taxes of $6,200.Its unlevered cost of capital is 14 percent and its tax rate is 34 percent.The firm has debt with both a book and a face value of $2,500.This debt has a 9 percent coupon and pays interest annually.What is the firm's weighted average cost of capital?

A)12.48 percent

B)13.60 percent

C)13.87 percent

D)14.14 percent

E)14.37 percent

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Chapter 17: Dividends and Payout Policy

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Sample Questions

Q1) Jenningston Mills has a market value equal to its book value.Currently,the firm has excess cash of $1,200,other assets of $5,800,and equity valued at $3,750.The firm has 250 shares of stock outstanding and net income of $420.What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

A)$1.83

B)$1.89

C)$1.96

D)$2.00

E)$2.08

Q2) A $0.60 quarterly cash payment paid by T.L.Jones & Co.to its shareholders in the normal course of business is called a: A)repurchase.

B)liquidating dividend.

C)regular cash dividend.

D)special dividend.

E)extra cash dividend.

Q3) Identify some real-world factors which might make it more difficult for an individual to effectively create a homemade dividend policy.

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Chapter 18: Short-Term Finance and Planning

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Sample Questions

Q1) Breakwater Aquatics has a 45 day accounts receivable period.The estimated quarterly sales for this year,starting with the first quarter,are $6,800,$7,100,$8,200,and $6,400,respectively.What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days.

A)$3,400

B)$3,550

C)$6,950

D)$7,100

E)$7,650

Q2) A graphical representation of the operating and cash cycles is called a(n):

A)operating chart.

B)cash flow time line.

C)production flow line.

D)component chart.

E)working time line.

Q3) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.

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Chapter 19: Cash and Liquidity Management

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Sample Questions

Q1) Check kiting is:

A)used by most firms as an ethical means of handling its cash reserves.

B)the process of withdrawing all funds from a bank account as soon as the funds are available.

C)the central core of a good cash management system.

D)using uncollected cash to invest in short-term, liquid assets.

E)increasingly popular due to recent banking law changes.

Q2) You are considering implementing a lockbox system for your firm.The system is expected to reduce the average collection time by 2.8 days.On an average day,your firm receives 2,419 checks with an average value of $1,287 each.The daily interest rate on Treasury bills is 0.016 percent.The bank charge per check is $0.30.What is the net present value of this lockbox arrangement?

A)-$4,535,625

B)-$2,611,575

C)$187,419

D)$4,181,483

E)$13,252,733

Q3) Explain how a lockbox system operates and why a firm might consider implementing such a system.

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Page 21

Chapter 20: Credit and Inventory Management

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Sample Questions

Q1) The optimal amount of credit equates the incremental costs of carrying the increase in accounts receivable to the incremental:

A)decrease in the cash cycle.

B)benefit from decreasing the inventory level.

C)cash flows from increased sales.

D)increase in bad debts.

E)gain in net profits.

Q2) You have recently been hired as an accounting intern for Jefferson Mills.The job that you have been assigned for today is to compile a spreadsheet that has six columns.The column headings are: Invoice #; Customer name; < 30 days; 31-60 days; 61-90 days; > 90 days.You are to list every unpaid invoice by customer name with the amount owed entered into the appropriate column for the number of days between the sale date and today.Once you have completed that,you are to sort the report by customer name and then total the amounts listed in each column.What is this report called?

A)credit report

B)aging schedule

C)risk assessment report

D)turnover delineation

E)receivables consolidation report

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Page 22

Chapter 21: International Corporate Finance

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Sample Questions

Q1) Which one of the following formulas correctly describes the relative purchasing power parity relationship?

A)E(St) = S0 × [1 + (hFChUS)]t

B)E(St) = S0 × [1 - (hFChUS)]t

C)E(St) = S0 × [1 + (hUS + hFC)]t

D)E(St) = S0 × [1 - (hUShFC)]t

E)E(St) = S0 × [1 + (hUShFC)]t

Q2) Absolute purchasing power parity is most apt to exist for which one of the following items?

A)lumber

B)computer

C)silver

D)automobile

E)cell phone

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Chapter 22: Behavioral Finance: Implications for Financial Management

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Q1) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.

Q2) Amy is the chief financial officer of a retail toy store.Recently,she decided that the firm should expand its operations and open two additional stores.Within a very brief period,it was obvious that Amy had made a very bad decision in opening those stores,given that the economy is in the middle of a severe recession.In reflecting back on her decision,Amy realizes that she made a bad decision due to a reasoning error.Which one of the following areas of study best applies to this situation?

A)corporate ethics

B)financial statement analysis

C)managerial finance

D)debt management

E)behavioral finance

Q3) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.

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Page 24

Chapter 23: Enterprise Risk Management

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Q1) Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus 0.5 percent.Cat's can borrow money at either a variable rate of prime plus 1 percent or a fixed rate of 8 percent.Dog's prefers a fixed rate and Cat's prefers a variable rate.Given this information,which one of the following statements is correct?

A)After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent. B)Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's.

C)Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus 0.75 percent variable rate.

D)Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's.

E)Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.

Q2) Explain why a swap is effectively a series of forward contracts.

Q3) What is cross-hedging?

Why do you suppose firms use this method of risk management? What are some of the drawbacks?

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Chapter 24: Options and Corporate Finance

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Sample Questions

Q1) You sold three $35 call option contracts at a quoted price of $1.40.What is your net profit or loss on this investment if the price of the underlying asset is $38.10 on the option expiration date?

A)-$510

B)-$90

C)$90

D)$510

E)$930

Q2) The conversion value of a convertible bond is equal to which one of the following?

A)Conversion ratio × Stock price

B)Conversion ratio × Conversion price

C)Face value of the bond/Conversion premium

D)Face value of the bond × (1 + Conversion premium)

E)Stock price × (1 + Conversion ratio)

Q3) Explain how the floor and the ceiling prices for a convertible bond are determined.

Q4) What are the upper and lower bounds for an American call option?

Explain what would happen in each case if the bound was violated.

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Chapter 25: Option Valuation

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Q1) Which one of the following best defines the primary purpose of a protective put?

A)ensure a maximum purchase price in the future

B)offset an equivalent call option

C)limit the downside risk of asset ownership

D)lock in a risk-free rate of return on a financial asset

E)increase the upside potential return on an investment

Q2) The Black-Scholes option pricing model can be used for:

A)American options but not European options.

B)European options but not American options.

C)call options but not put options.

D)put options but not call options.

E)both zero coupon bonds and coupon bonds.

Q3) The implied standard deviation used in the Black-Scholes option pricing model is:

A)based on historical performance.

B)a prediction of the volatility of the return on the underlying asset over the life of the option.

C)a measure of the time decay of an option.

D)an estimate of the future value of an option given a strike price (E).

E)a measure of the historical intrinsic value of an option.

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Page 27

Chapter 26: Mergers and Acquisitions

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Q1) Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland Motors stock.Inland Motors has 6,200 shares of stock outstanding at a price of $49 a share.Glendale Marine has 1,700 shares outstanding with a market value of $30 a share.The incremental value of the acquisition is $2,600.What is the total number of shares in the new firm?

A)7,229 shares

B)7,282 shares

C)7,529 shares

D)7,852 shares

E)7,900 shares

Q2) Which one of the following best defines synergy given the following?

VA = Value of firm A

VB = Value of firm B

VAB = Value of merged firm AB

A)(VA + VB) - VAB

B)VAB - (VA + VB)

C)greater of 0 or (VA + VB) - VAB

D)greater of 0 or VAB - (VA + VB)

E)greater of 0 or VAB

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Chapter 27: Leasing

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Sample Questions

Q1) Frank's Auto Repair can purchase a new machine for $136,000.The machine has a 4-year life and can be sold at the end of year 4 for $12,000.Frank's uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment can be leased for $35,900 a year.The firm can borrow money at 7.5 percent and has a 32 percent tax rate.The company does not expect to owe any taxes for at least the next 4 years due to net operating losses.What is the incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment?

A)-$47,900

B)-$35,900

C)-$20,900

D)$15,900

E)$35,900

Q2) An operating lease:

A)is recorded at its net present value on the balance sheet.

B)is recorded on the balance sheet as both an asset and a liability.

C)is recorded at its estimated residual balance on the balance sheet.

D)is reflected in the footnotes rather than on the balance sheet.

E)does not appear either on a financial statement or in the footnotes.

Q3) What are some "good" reasons for opting to lease rather than purchase an asset?

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