Financial Analysis and Decision Making Pre-Test Questions
Course Introduction
Financial Analysis and Decision Making equips students with the essential tools and methodologies to interpret and evaluate financial information for effective business decisions. The course covers financial statement analysis, ratio analysis, forecasting, budgeting, and capital investment appraisal, enabling students to assess organizational performance, identify financial strengths and weaknesses, and make informed strategic choices. Through practical case studies and real-world examples, students develop critical thinking skills and gain confidence in using financial data to support managerial decision-making in a variety of settings.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) The top financial officer in a firm is commonly referred to as the:
A)chief financial officer
B)president of finance
C)controller
D)treasurer
E)finance manager
Answer: A
Q2) The primary market refers to:
A)the original sale of securities by the issuer
B)transactions between two institutional shareholders
C)the sale of securities by an individual shareholder
D)the first trade of a firm's securities when the financial markets open in the morning
E)all transactions on the NYSE
Answer: A
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) Which of the following is an intangible fixed asset?
A)inventory
B)delivery truck
C)patents
D)accounts receivable
E)buildings
Answer: C
Q2) Depreciation does which one of the following for a profitable firm?
A)increases net income
B)increases net fixed assets
C)decreases net working capital
D)lowers taxes
E)has no effect on net income
Answer: D
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The cash ratio is defined as cash divided by:
A)current assets
B)current liabilities
C)total assets
D)total debt
E)total equity
Answer: B
Q2) A firm has sales of $428 000 for the year.The profit margin is 3.4 per cent and the retention ratio is 60 per cent.What is the common-size percentage for the dividends paid?
A)0.99 per cent
B)1.18 per cent
C)1.21 per cent
D)1.36 per cent
E)1.42 per cent
Answer: D
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) When you were born,your parents opened an investment account in your name and deposited $500 into the account.The account has earned an average annual rate of return of 4.8 per cent.Today,the account is valued at $36 911.22.How old are you?
A)74.47 years
B)76.67 years
C)81.08 years
D)87.33 years
E)91.75 years
Q2) How long will it take to double your savings if you earn 3.6 per cent interest,compounded annually?
A)17.78 years
B)18.04 years
C)18.67 years
D)19.42 years
E)19.60 years
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Kristi is considering an investment that will pay $5000 a year for 7 years,starting one year from today.How much should she pay for this investment if she wishes to earn a 12 per cent rate of return?
A)$17 899.08
B)$18 023.88
C)$20 186.75
D)$22 818.78
E)$24 507.19
Q2) Which one of the following is generally valued as a perpetuity?
A)short-term bond
B)long-term bond
C)non-dividend paying share
D)ordinary share paying increasing dividends
E)preferred stock
Q3) An increase in the amount of an annuity payment will:
A)have no effect on the present value of the annuity
B)decrease the present value of the annuity
C)increase the value of the annuity present value interest factor
D)increase the future value of the annuity
E)decrease the value of the annuity future value interest factor
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A convertible bond has features of both debt and equity because:
A)the bond can be exchanged for shares
B)the bondholder is granted an equity position in the firm and receives interest income
C)the bond pays both interest and dividends
D)the bondholder can force the firm to redeem the bond at any time
E)the bondholders have voting rights
Q2) Which party to a bill of exchange is primarily responsible for the payment of the face value to the holder at maturity?
A)the discounter
B)the borrower
C)the drawer
D)the acceptor
E)the endorser
Q3) An unsecured note is:
A)long-term debt secured by part,or all,of the assets of the borrower
B)debt that is secured by a borrower's accounts receivables
C)unsecured debt that is generally payable within the next ten years
D)a formal type of loan that is secured by real estate
E)the written agreement which details the information relative to a bond issue
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Page 8
Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) The required return:
A)tends to be low for the share of a firm which is experiencing rapid growth
B)provides an estimate of the return an investor might expect if he or she purchases a share at today's market price
C)places more emphasis on the capital gains yield than on the dividend yield
D)is based on the assumption that a share will maintain a constant dividend
E)is based on the projected dividend and share price for next year
Q2) If shareholders are granted a preemptive right they will be:
A)granted shares that receive additional voting privileges
B)given the choice of receiving dividends in cash or in additional shares of stock
C)paid dividends prior to the preferred shareholders during the pre-emptive period
D)able to determine who the candidates should be for any open seats on the board
E)given the first right to purchase any new shares that are issued
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) The reinvestment approach to the modified internal rate of return:
A)individually discounts each separate cash flow back to the present
B)reinvests all the cash flows,including the initial cash flow,to the end of the project
C)discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project
D)discounts all negative cash flows back to the present and combines them with the initial cost
E)compounds all of the cash flows,except for the initial cash flow,to the end of the project
Q2) Which one of the following indicates that a project is expected to create value for its owners?
A)a profitability index less than 1.0
B)a payback period greater than the requirement
C)a positive net present value
D)a positive average accounting rate of return
E)an internal rate of return that is less than the requirement
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10
Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The Shoe Box is considering adding a new line of winter footwear to its product line-up.Which of the following are relevant cash flows for this project?
I.decreased revenue from products currently being offered if this new footwear is added to the line-up
II.revenue from the new line of footwear
III.money spent to date looking for a new product line to add to the store's offerings
IV.cost of new counters to display the new line of footwear
A)I and IV only
B)II and IV only
C)II and III only
D)I,II and IV only
E)II,III and IV only
Q2) Which one of the following can be completely ignored when analysing a project?
A)depreciation
B)taxes
C)net working capital
D)sunk cost
E)erosion
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11
Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) What was the average risk premium on Australian government bonds for the period 1985-2009?
A)5.3%
B)0.0%
C)9.7%
D)1.7%
E)8.0%
Q2) Standard deviation is defined as the:
A)average squared difference between the actual return and the average return
B)square root of the average returns
C)mean of the actual returns
D)square root of the mean of the actual returns
E)positive square root of the variance
Q3) The standard deviation measures the _____ of a security's returns over time.
A)average value
B)frequency
C)volatility
D)mean
E)arithmetic average
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Page 12
Chapter 11: Risk and Return
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Sample Questions
Q1) The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is called the:
A)market risk premium
B)beta coefficient
C)security's alpha
D)standard deviation
E)asset mean
Q2) Diversifying a portfolio across various sectors and industries might do more than one of the following.However,this diversification must do which one of the following?
A)reduce the portfolio's systematic risk level
B)reduce the beta of the portfolio to zero
C)increase the security's risk premium
D)increase the expected risk premium
E)reduce the portfolio's unique risks
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13
Chapter 12: Long-Term Financing
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Sample Questions
Q1) Western Australian Mining Pty Ltd,an Australian listed company,has 5 000 000 ordinary shares outstanding and the current market price per share is $6.50.The required rate of return for the ordinary shares is estimated to be 16%.They have issued bonds with a face value of $15 000 000 but the current market value based on a yield to maturity of 9.5% is $14 950 233.If the corporate tax rate is 30% what is the weighted average cost of capital assuming an imputation tax system? Assume all registered shareholders are Australian residents and all dividends are fully franked.
A)13.06%
B)12.75%
C)8.93%
D)11.33%
E)9.77%
Q2) The cost of capital for a project should:
A)be adjusted based on the size of the project
B)remain constant even if a decision on accepting the project is delayed for two years
C)meet or exceed the internal rate of return of the project
D)never exceed the cost of capital for the overall firm
E)be adjusted based on the risk of the project
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Deltona,USA is a development company that is currently financed with 100 per cent equity.There are 15 000 shares outstanding at a market price of $50 a share.Deltona has earnings before interest and taxes (EBIT)of $20 000.The firm has decided to issue $250 000 of debt at a rate of 8 per cent and use the proceeds to repurchase shares.Theresa owns 500 shares of Deltona and wants to use homemade leverage to offset the leverage used by Deltona.Theresa should:
A)buy an additional 167 shares
B)sell 250 shares
C)sell 133 shares
D)buy an additional 150 shares
E)sell 167 shares
Q2) Paying interest reduces the taxes owed by a firm.Which one of the following terms applies to this relationship?
A)financial risk
B)M&M Proposition I
C)interest tax shield
D)static theory of interest rates
E)homemade leverage
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Page 15
Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Which of the following are given as reasons for a reverse stock split?
I.the lowering of the stock price to a level within the normal trading range for the stock
II.to eliminate small shareholders
III.to meet the minimum price per share requirement of a stock exchange
IV.to avoid delisting
A)I only
B)I and IV only
C)II,III and IV only
D)II and III only
E)I,II and III only
Q2) Which one of the following is a payment of either cash or shares that is paid out of earnings to a firm's shareholders?
A)retained earnings
B)dividend
C)stock repurchase
D)interest
E)distribution
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Chapter 15: Raising Capital
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Sample Questions
Q1) A public issue of securities which are first offered to existing shareholders is best defined as a(n):
A)IPO
B)rights offer
C)private placement
D)general cash offer
E)general offer
Q2) The spread is the difference between the underwriter's purchase price and:
A)the market price
B)the price listed in the prospectus
C)the opening price
D)the first day's closing price
E)the offer price
Q3) Venture capital is most apt to be the source of funding for which one of the following?
A)global expansion for an established firm
B)bankruptcy reorganisation
C)new,high-risk venture
D)seasonal production
E)daily operations for an established,profitable firm
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A)inventory period
B)operating cycle
C)cash cycle
D)accounts payable period
E)accounts receivable period
Q2) Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.
A)operating cycle
B)accounts receivable period
C)cash cycle
D)accounts payable period
E)inventory period
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) Which one of the following is a speculative motive for holding cash?
A)paying the annual insurance premium on the firm's assets
B)contributing $1000 to help fund medical care for an uninsured neighbour
C)needing to purchase a new delivery truck because the old one was totally destroyed in an accident
D)paying a $100 bonus to all employees at year end
E)buying extra inventory because a key supplier offered a special one-time discount
Q2) Laurie's Ice Rink keeps an extra $1500 in its cheque account simply in case an emergency arises.Which type of motive for holding cash does this represent?
A)availability
B)speculative
C)float requirement
D)transaction
E)precautionary
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Which one of the following is an example of the political risks associated with foreign operations?
A)changes in foreign tax laws
B)technological changes
C)exchange rate fluctuations
D)translation exposure to exchange rate risk
E)changes in relative wage rates between the home country and the foreign country
Q2) You are planning a trip to the UK and plan on spending 3600 pounds.How many dollars will this trip cost you if the exchange rate per one Australian dollar is 0.6789 pounds?
A)$2444.04
B)$5302.70
C)$6044.04
D)$3892.16
E)$5890.01
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