Financial Decision Making
Exam Answer Key
Course Introduction
Financial Decision Making is a course designed to equip students with the essential concepts, tools, and analytical frameworks necessary for making informed financial decisions in both personal and organizational contexts. The course covers topics such as financial statement analysis, time value of money, capital budgeting, risk assessment, and the evaluation of financing options. Through case studies, real-world examples, and quantitative exercises, students learn how to approach financial problems, assess alternative strategies, and understand the impact of their decisions on overall financial performance and value creation.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) If you pursue a business career in a nonfinance profession you will not be exposed to finance concepts on the job.
A)True
B)False
Answer: False
Q2) The study of finance consists of three areas financial markets, investments, and managerial finance that are basically independent of each other, because you can be an expert in one area without having knowledge of the other two.
A)True
B)False
Answer: False
Q3) A major reason there has been a great deal of deregulation in the banking industry since the 1970s is due to the emergence of nonbank organizations and the need to increase competitiveness of U.S.banks and other financial institutions.
A)True
B)False Answer: False
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Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) The Eurodollar market is essentially a long-term market; most loans and deposits have maturities of longer than one year.
A)True
B)False
Answer: False
Q2) Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare.
A)True
B)False
Answer: False
Q3) All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a
A) Sinking fund.
B) Restrictive covenant.
C) Call provision.
D) Change in rating from Aa to Aaa.
E) None of the above (all may reduce the required coupon rate).
Answer: C
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4
Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to investment bankers, who in turn sold it to individual and institutional investors.A transaction such as this is said to be a primary market transaction.
A)True
B)False Answer: True
Q2) After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.
A)True
B)False Answer: True
Q3) The derivatives market allows for
A) investors to speculate on price movements.
B) the purchase corporate debt.
C) the hedging of exposure to price movements
D) two of the above
E) all of the above
Answer: D
Page 5
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) The 1978 International Bank Act
A) prohibited foreign banks from establishing any new U.S.banking operations.
B) allowed U.S.banks to engage in a wider range of nonbanking activities overseas.
C) allowed U.S.banks to take equity positions in overseas business ventures.
D) reduced the competitive advantage of foreign banks over U.S.banks.
E) All of the above.
Q2) A(n) ____ is a depository institution that is owned by its depositors, who are members of a common organization or association, such as an occupation, a religious group, or a community.
A) pension fund
B) commercial bank
C) credit union
D) insurance company
E) mutual fund
Q3) Most of the financial panics experienced by the United States in the past can be traced to the behavior of financial intermediaries who either took on too much risk or behaved unethically.
A)True
B)False
Page 6
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent.If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
A) 12.0%
B) 16.0%
C) 13.5%
D) 10.5%
E) 14.0%
Q2) The price of a bond bought at a discount cannot go down in the financial markets. A)True
B)False
Q3) If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.
A)True
B)False
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7
Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) Which of the following statements is correct?
A) The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.
B) Procedures for electing corporate directors are contained in bylaws while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
C) Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
D) Although most companies design a charter, only the bylaws are legally required to be filed with the secretary of state in order for a corporation to be in official existence.
Q2) Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?
A) Attracting and sustaining new customers.
B) Hiring and keeping skilled employees.
C) Keeping up with competition.
D) Dealing with firms who use "questionable" ethics.
E) None of the above.
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Page 8
Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements is correct?
A) The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing.
B) Although the annual report is geared toward the average stockholder, it represents financial analysts' most complete source of financial information about the firm.
C) The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.
D) The annual report provides no relevant information for use by financial analysts or by the investing public.
E) None of the above statements is correct.
Q2) In the event of a firm's liquidation, the order in which claimholders are paid off is
A) debtholders, common stockholders, preferred stockholders
B) common stockholders, preferred stockholders, debtholders
C) debtholders, preferred stockholders, common stockholders
D) common stockholders, debtholders, preferred stockholders
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Page 9
Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Refer to Trident Food Corporation.How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point?
A) 2,000
B) 500
C) 4,800
D) 2,280
E) 6,800
Q2) Other things held constant, a high degree of operating leverage will mean that a relatively small change in sales will result in a large change in operating income.
A)True
B)False
Q3) Lumpy assets primarily affect the turnover of fixed assets and, consequently, the financial requirements associated with the expansion of operations.
A)True
B)False
Q4) Operating costs include variable costs, depreciation and interest charges.
A)True
B)False
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Page 10
Chapter 9: Time Value of Money
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Sample Questions
Q1) The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding.The loan is to be amortized in end-of-quarter payments over its 3-year life.How much interest (in dollars) will your company have to pay during the second quarter?
A) $15,675.19
B) $18,508.81
C) $21,205.33
D) $24,678.89
E) $28,111.66
Q2) Which of the following is not a rationale for using the NPV method in capital budgeting?
A) An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital.
B) A project whose NPV is positive will increase the value of the firm if that project is accepted.
C) A project is considered acceptable if it has a positive NPV.
D) A project is not considered acceptable if it has a negative NPV.
E) All of the above are true.
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Chapter 10: Valuation Concepts
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Sample Questions
Q1) Recently, Ohio Hospitals Inc.filed for bankruptcy.The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect.The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually.The new agreement allows the firm to pay no interest for 5 years.Then, interest payments will be resumed for the next 5 years.Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid.However, no interest will be paid on the deferred interest.If the required return is 20 percent, what should the bonds sell for in the market today?
A) $242.26
B) $281.69
C) $578.31
D) $362.44
E) $813.69
Q2) The present value of a $1,000 par value bond with an eight percent semi-annual coupon, five years to maturity and a six percent yield to maturity is $1,085.30.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) The correlation coefficient is a measure of the degree of relationship between two variables.
A)True
B)False
Q2) If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
A)True
B)False
Q3) ____ is the appropriate measure for stand-alone risk and ____ is the appropriate measure of risk when adding an asset to a diversified portfolio.
A) beta; variance
B) beta; standard deviation
C) standard deviation; beta
D) standard deviation; variance
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) Assume that a firm's financial analysts determine that a decrease in the firm's debt-to-assets ratio will cause a decrease in both the component cost of debt r<sub>d</sub>(1 T) and the component cost of equity (r<sub>s</sub>).This information tells us that the firm's present debt-to-assets ratio is above its optimal ratio.
A)True
B)False
Q2) The after-tax cost of debt is always less than the before-tax cost of debt for all firms.
A)True
B)False
Q3) Refer to Byron Corporation.What is the maximum amount of new capital that can be raised at the lowest component cost of equity? (In other words, what is the retained earnings break point?)
A) $12,600
B) $14,700
C) $17,400
D) $21,000
E) $24,500
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Chapter 13: Capital Budgeting
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Sample Questions
Q1) Given the following information, calculate the NPV of a proposed project: Cost = $4,000; estimated life = 3 years; initial decrease in accounts receivable = $1000, which must be restored at the end of the project's life; estimated salvage value = $1,000; net income before taxes and depreciation = $2,000 per year; method of depreciation = MACRS; tax rate = 40 percent; required rate of return = 18 percent.
A) $1,137
B) $151
C) $137
D) $804
E) $544
Q2) The internal rate of return for a project that has initial costs of $10,000 and generates cash flows of $7,000 in year one, $8,000 in year two, and $5,000 in year three is 35.7%.
A)True
B)False
Q3) A particular project might have very uncertain cash flows, hence a highly uncertain NPV and IRR, yet it may not have high market risk.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) The weighted average cost of capital (WACC) declines as more of the lowest cost component is added.What limits a firm from using nearly all debt is that as the debt-to-assets ratio rises, the absolute interest expense gets very large.The large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to decline.
A)True
B)False
Q2) It has been shown that a firm's beta ____ an increase in its degree of financial leverage.
A) increases with B) decreases with C) remains constant with D) is not related to
Q3) Which of the following factors do not have an impact on the business risk of a firm?
A) Sales variability
B) Input price variability
C) Price elasticity
D) Operating leverage
E) All of the above impact a firm's business risk
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Page 16
Chapter 15: Working Capital Management
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Sample Questions
Q1) If the forecasted sales or usage rate is not accurate, the EOQ model may not lead to efficient inventory management.
A)True
B)False
Q2) Bass Boats Inc.currently has sales of $1,000,000, and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000.However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent).Variable costs are 80 percent of sales, and Bass has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?
A) $20,000
B) $10,000
C) $0
D) $10,000
E) $20,000
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Chapter 16: Investment Concepts
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Sample Questions
Q1) Because the computations for different market indexes are essentially the same, it really doesn't matter which index is used to determine how the performance of your investment portfolio compares to the market.
A)True
B)False
Q2) The degree of risk adversity exhibited by investors varies among individuals at any point in time and changes for individuals across time.
A)True
B)False
Q3) A ____ order is an order to buy or sell a stock at no worse than a specified price.
A) price
B) limit
C) market
D) stop
Q4) To trade securities an individual must be licensed by the exchanges on which the traded securities are listed.
A)True
B)False
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Page 18
Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms.
A)True
B)False
Q2) When there is deficit spending in the United States, the amount of goods and services that is imported exceed the amount that is exported.
A)True
B)False
Q3) Investments professionals agree that individuals should be disciplined with their investment strategy.Their advice would be: "don't change approaches just because results aren't immediate."
A)True
B)False
Q4) Economists define a recession as a contraction in the economy in at least three out of the last five quarters.
A)True
B)False
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