Finance for Decision Making Study Guide
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Course Introduction
Finance for Decision Making equips students with foundational financial concepts and tools essential for effective business decision-making. The course covers topics such as financial statement analysis, budgeting, capital investment appraisal, risk assessment, and cost of capital, emphasizing their practical application in real-world scenarios. Students learn to evaluate financial information, interpret key ratios, and utilize financial data to support strategic choices within organizations. Through case studies and problem-solving exercises, the course fosters an understanding of how financial insights drive business success and long-term value creation.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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16 Chapters
1174 Verified Questions
1174 Flashcards
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Page 2
Chapter 1: Introduction to Corporate Finance
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61 Flashcards
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Sample Questions
Q1) A business owned by a single individual is called a: A)corporation.
B)sole proprietorship.
C)general partnership.
D)limited partnership.
E)limited liability company.
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
Q3) What advantages does the corporate form of organization have over sole proprietorships or partnerships?
Answer: The advantages of the corporate form of organization over sole proprietorships and partnerships are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise more capital,and the opportunity of an unlimited life of the business.
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) As seen on an income statement:
A)interest is deducted from income and increases the total taxes incurred.
B)the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses.
C)depreciation is shown as an expense but does not affect the taxes payable.
D)depreciation reduces both the pretax income and the net income.
E)interest expense is added to earnings before interest and taxes to get pretax income.
Answer: D
Q2) Net capital spending is equal to:
A)net additions to net working capital.
B)the net change in fixed assets.
C)net income plus depreciation.
D)total cash flow to stockholders less interest and dividends paid.
E)the change in total assets.
Answer: B
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4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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117 Flashcards
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Sample Questions
Q1) What is the debt-equity ratio for 2011?
A)22.5%
B)26.2%
C)35.5%
D)45.1%
E)47.7%
Answer: C
Q2) Rosita's Resources paid $250 in interest and $130 in dividends last year.The times interest earned ratio is 3.8 and the depreciation expense is $80.What is the value of the cash coverage ratio?
A)2.71
B)3.64
C)4.12
D)5.78
E)6.10
Answer: C
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Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) The two fatal flaws of the internal rate of return rule are:
A)arbitrary determination of a discount rate and failure to consider initial expenditures.
B)arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
C)arbitrary determination of a discount rate and the multiple rate of return problem.
D)failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
E)failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.
Q2) Analysis using the profitability index:
A)frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B)is useful as a decision tool when investment funds are limited.
C)cannot be used to aid capital rationing.
D)utilizes the same basic variables as those used in the average accounting return.
E)produces results which typically are difficult to comprehend or apply.
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) The bonds of Jerrod's Welding,Inc.pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000.The current rate of inflation is 2.5%.What is the real rate of return on these bonds?
A)5.32%
B)5.35%
C)5.37%
D)5.42%
E)5.48%
Q2) You own a bond that has a 7% coupon and matures in 12 years.You purchased this bond at par value when it was originally issued.If the current market rate for this type and quality of bond is 7.5%,then you would expect:
A)the bond issuer to increase the amount of each interest payment on these bonds.
B)the yield to maturity to remain constant due to the fixed coupon rate.
C)to realize a capital loss if you sold the bond at the market price today.
D)today's market price to exceed the face value of the bond.
E)the current yield today to be less than 7%.
Q3) Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity,a 10% annual coupon rate,and a return of $1,000 at maturity.
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7
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Over the period of 1926 to 2012,small company stocks had an average return of __%.
A)8.8
B)10.2
C)12.4
D)14.6
E)16.5
Q2) The risk premium is computed by ______ the average return for the investment.
A)subtracting the inflation rate from B)adding the inflation rate to
C)subtracting the average return on the U.S.Treasury bill from D)adding the average return on the U.S.Treasury bill to E)subtracting the average return on long-term government bonds from
Q3) A stock had returns of 7%,9%,-3%,and 5% over the past four years.What is the standard deviation of this stock for the past four years?
A)4.5%
B)6.4%
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Page 8
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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125 Flashcards
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Sample Questions
Q1) The intercept point of the security market line is the rate of return which corresponds to:
A)the risk-free rate of return.
B)the market rate of return.
C)a value of zero.
D)a value of 1.0.
E)the beta of the market.
Q2) The portfolio expected return considers which of the following factors?
I.the amount of money currently invested in each individual security
II.various levels of economic activity
III.the performance of each stock given various economic scenarios
IV.the probability of various states of the economy
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV
Q3) Explain in words what beta is and why it is important.
Q4) The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels;explain why it is so.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:
A)the expected part of the announcement.
B)market inefficiency.
C)the unexpected part of the announcement.
D)the systematic risk.
E)None of the above.
Q2) Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.8.The portfolio has a beta of:
A)0.0
B)0.8
C)0.9
D)1.0
E)1.8
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Q4) Discuss the Fama-French three factor model;both what it means and the factors of the model.
Page 10
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) Which of the following tend to reinforce the argument that the financial markets are efficient?
I.Information spreads rapidly in today's world.
II.There is tremendous competition in the financial markets.
III.Market prices continually fluctuate.
IV.Market prices react suddenly to unexpected news announcements.
A)I and III only
B)II and IV only
C)I,II,and III only
D)II,III,and IV only
E)I,II,III,and IV
Q2) An investor discovers that for a certain group of stocks,large positive price changes are always followed by large negative price changes.This finding is a violation of the:
A)moderate form of the efficient market hypothesis.
B)semistrong form of the efficient market hypothesis.
C)strong form of the efficient market hypothesis.
D)weak form of the efficient market hypothesis.
E)None of the above.
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10.If they are sold to shareholders at $10 each,what would the capital surplus be?
A)$100
B)$900
C)$9,900
D)$10,000
E)$11,000
Q2) The market-to-book value ratio is implies growth and success when it is:
A)greater than 0.
B)less than 10.
C)less than 0.
D)less than 1.
E)greater than 1.
Q3) If a debenture is subordinated,it:
A)has a higher priority status than specified creditors.
B)is secondary to equity.
C)must give preference to the specified creditor in the event of default.
D)has been issued because the company is in default.
E)None of the above.
Q4) From this information,calculate Eaton's book value per share.
Page 12
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Chapter 20: Raising Capital
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65 Flashcards
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Sample Questions
Q1) Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:
A)underwriters buy at an agreed upon price and bear some risk of selling the issue.
B)cash proceeds are available sooner in underwriting and the issue is available to a wider market.
C)investment bankers can provide market advice and certify the issue for potential investors.
D)All of the above.
E)None of the above.
Q2) The market for venture capital refers to the:
A)private financial marketplace for servicing small,young firms. B)bond markets.
C)market for selling rights to individuals who already own shares.
D)market for selling equity securities for firms with equity already outstanding.
E)None of the above.
Q3) If the ex-rights price were set at $7.90,would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
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Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) The assets of Blue Light Specials are currently worth $2,100.These assets are expected to be worth either $1,800 or $2,300 one year from now.The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year.The risk-free rate is 5%.What is the value of the equity in this firm?
A)$166.67
B)$231.42
C)$385.71
D)$405.00
E)$714.29
Q2) In the Black-Scholes option pricing formula,N(d<sub>1</sub>)is the probability that a standardized,normally distributed random variable is:
A)less than or equal to N(d<sub>2</sub>).
B)less than one.
C)equal to one.
D)equal to d<sub>1</sub>.
E)less than or equal to d<sub>1</sub>.
Q3) Explain the rationale behind the statement that equity is a call option on the firm's assets.When would a shareholder allow the call to expire?
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) Executives cannot exercise their options for a fixed period of time.This is the:
A)investing period.
B)freeze-out period.
C)valuation period.
D)guaranteed growth period.
E)strike period.
Q2) If a project has optionality:
A)the shorter the available life of the project the less valuable the project is.
B)the longer the available life of the project the less valuable the project is.
C)the shorter the available life of the project the more valuable the project is.
D)available project life does not change optionality.
E)None of the above.
Q3) What is the value of a call option?
A)$4.14
B)$4.86
C)$5.13
D)$5.62
E)$6.16
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) A convertible bond is selling for $800.It has 10 years to maturity,a $1000 face value,and a 10% coupon paid semi-annually.Similar nonconvertible bonds are priced to yield 14%.The conversion price is $50 per share.The stock currently sells for $31.375 per share.Determine the bond's option premium.
Q2) The exercise of warrants creates new shares which:
A)increases the total number of shares but does not affect share value.
B)increases the total number of shares which can reduce an individual share value.
C)does not change the number of shares outstanding,similar to options.
D)increases share value because cash is paid into the firm at the time of warrant exercise.
E)None of the above.
Q3) What would the conversion price and conversion ratio be if Xenron had a 3 for 1 stock split?
A)$7.33;75
B)$9.52;105
C)$22.00;25
D)$28.57;35
E)None of the above.
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Page 16
Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) A derivative is a financial instrument whose value is determined by:
A)a regulatory body such as the FTC.
B)a primitive or underlying asset.
C)hedging a risk.
D)hedging a speculation.
E)None of the above.
Q2) Derivatives can be used to either hedge or speculate.These actions:
A)increase risk in both cases.
B)decrease risk in both cases.
C)spread or minimize risk in both cases.
D)offset risk by hedging and increase risk by speculating.
E)offset risks by speculating and increase risk by hedging.
Q3) If a firm purchases a cap at 10% this will:
A)limit the amount of borrowing to 10% of assets.
B)pay the firm 10% on their purchase.
C)pay the holder the LIBOR interest above 10%.
D)pay the holder the LIBOR interest below the 10%.
E)None of the above.
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
Q5) What new asset duration will immunize the balance sheet?
Page 17
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Chapter 31: International Corporate Finance
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Sample Questions
Q1) The changes in the relative economic conditions between countries are referred to as the:
A)international Fisher effect.
B)international exchange rate effect.
C)translation exposure to exchange rate risk.
D)long-run exposure to exchange rate risk.
E)the interest rate parity risk.
Q2) Currently,$1 will buy C$1.36 while $1.10 will buy 1.What is the exchange rate between the Canadian dollar and the euro?
A)C$1 = 1.10
B)C$1 = .9091
C)C$1 = 1.2364
D)C$1.36 = 1.10
E)C$1.36 = .9091
Q3) The forward rate market is dependent upon:
A)current forward rates exceeding current spot rates.
B)current spot rates exceeding current forward rates over time.
C)current spot rates equaling current forward rates on average over time.
D)forward rates equaling the actual future spot rates on average over time.
E)current spot rates equaling the actual future spot rates on average over time.
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