Course Introduction
Financial Decision Making
Exam Answer Key
Financial Decision Making is a course that equips students with the analytical tools and frameworks necessary to make informed financial decisions in both personal and organizational contexts. The curriculum covers fundamental concepts such as the time value of money, risk and return analysis, capital budgeting, financial statement interpretation, and basic investment strategies. Through real-world case studies, simulations, and problem-solving exercises, students learn to apply quantitative techniques to evaluate financial options, assess business opportunities, and manage resources effectively. The course is designed to foster critical thinking, ethical understanding, and strategic decision-making skills essential for careers in finance, business management, and entrepreneurship.
Recommended Textbook
Contemporary Financial Management 13th Edition by R.
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Charles Moyer
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) All of the following economic environment factors affect stock prices except:
A)investment strategies
B)competition
C)tax rates
D)currency exchange rates
Answer: A
Q2) The primary objective of the firm is:
A)Shareholder wealth maximization
B)Social responsibility
C)Long run survival
D)Profit maximization
Answer: A
Q3) Many small business owners are diversified with respect to their personal wealth.
A)poorly
B)highly
C)well
D)90%
Answer: A
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) All of the following have tax implications as it concerns financial management decisions EXCEPT:
A)Capital structure
B)Dividend policy
C)Inventory control
D)Leasing
Answer: C
Q2) The Dow Jones Industrial Average is calculated using the
A)total market value of 30 stocks
B)price of 30 stocks
C)a weighted index of 30 stocks
D)industrial, railroad, financial, and utility stocks
Answer: B
Q3) If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be trading at a _____.
A)forward premium
B)forward gain
C)forward discount
D)forward loss
Answer: C
Page 4
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) A firm's return on equity is a function of its net profit margin, and equity multiplier.
A)current ratio
B)cost of goods
C)total asset turnover
D)fixed asset turnover
Answer: C
Q2) What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?
A)26.0%
B)16.9%
C)6.5%
D)4.6%
Answer: A
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) The financial forecasting and planning model that is becoming increasingly popular because they often provide financial decision makers with more useful information than other models is
A)the deterministic model
B)the probabilistic model
C)the optimization model
D)sensitivity analysis
Q2) Which of the following statements is/are correct about deferred taxes?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) Cash budgeting can be employed effectively by management to
A)identify potential cash flow problems in advance
B)aid them in capital budgeting
C)control retained earnings
D)coordinate cash and deferred expenses
Q4) Why would a firm experience cash flow difficulties immediately after a good sales period?
Q5) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Q1) What is/are the difference(s) between simple interest and compound interest?
Q2) A zero coupon bond with a $1,000 par value (future value) is selling for $356 and matures in 12 years.What is the implied discount rate (yield to maturity)?
A)9%
B)9.36%
C)9.12%
D)9.4%
Q3) The difference between an ordinary annuity and an annuity due is:
A)the interest rate
B)the timing of the payments
C)the amount of the payments
D)the number of periods
Q4) Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%.What is the annual effective rate of interest you are being charged on your credit card?
A)18.00%
B)18.64%
C)19.56%
D)29.74%
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Chapter 5: A: The Time Value of Money
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Q1) What is the value of $10,000 invested for 1 year at 8% compounded continuously?
A)$10,800
B)$10,833
C)$10,824
D)$11,268
Q2) In the continuous compounding equation, "e" is the
A)natural log to the base 10.
B)base number in natural logarithms
C)natural log to the base 1.
D)none of the above are correct
Q3) What is the effective interest rate if 10% is compounded continuously?
A)10.52%
B)10.97%
C)11.06%
D)10.11%
Q4) With continuous compounding
A)the effective rate is higher than the nominal rate
B)the effective rate is higher than the logarithmic rate
C)the base "e" is the effective rate
D)all these are correct
8
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Q1) Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years.In 2008 (today) the required return on bonds of this risk was 11%.The bonds pay interest semi-annually.What would you be willing to pay for one of these bonds today if you believe the bond will be called today?
A)$1188
B)$832.25
C)$1,100
D)$1,000
Q2) In reading price quotes on U.S.Treasury bills, you would expect to find the "asked" price higher than the "bid".
A)always
B)never
C)sometimes
D)seldom
Q3) List the advantages and disadvantages of long-term debt financing:
Q4) Explain a sinking fund.
Q5) What is a "paymentÂinÂkind" bond and why is it considered a "weak security"?
Q6) How does a firm value an asset?
Page 9
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) The earnings of Foggy Futures Weather Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year.Foggy currently pays a dividend of $0.36 per share.What is the value of Foggy's stock to an investor who requires a 16% rate of return?
A)$7.97
B)$7.76
C)$14.42
D)$11.11
Q2) Direct issuance costs are
A)higher for common stock than for preferred stock issues
B)dependent on the quality of the issue
C)dependent on the size of the issue
D)all of these are correct
Q3) All of the following are reasons that companies hold treasury stock EXCEPT:
A)to comply with SEC regulations that a certain amount of company shares must be kept by the company.
B)disposition of excess cash
C)financial restructuring
D)future corporate needs
Page 10
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) Which of the following would be considered a risk-free investment?
A)U.S.Treasury securities
B)blue chip stocks
C)AAA rated corporate bonds
D)real estate
Q2) An investor, by investing in combinations of stocks, develops a portfolio
A)simple
B)structured
C)diversified
D)energetic
Q3) The slope of the characteristic line for a specific security is an estimate of for that security.
A)beta
B)systematic risk
C)total risk
D)both beta and systematic risk
Q4) List types of events that influence systematic (non-diversifiable) risk.
Q5) List the various risk elements that are considered when determining the risk premium.
Q6) Why is risk an increasing function of time?
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) The net investment calculation for an asset replacement decision normally includes any .
A)after-tax salvage value of the old asset
B)increase in net working capital
C)after-tax salvage value of the old asset and increase in net working capital
D)cannot be computed
Q2) LISP Inc.is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first year depreciation rate = 33.33%).The new mixer should increase revenues by $20,000 per year with no increase in operating cost.If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?
A)$22,665
B)$19,000
C)$18,666
D)$21,500
Q3) The dollar amount of interest charges is:
A)always considered in the net cash flow calculation
B)normally not considered in the net cash flow calculation
C)always considered as a part of the net investment
D)never a consideration
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Q1) Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years.What is the NPV of this project if Kinetics cost of capital is 14%?
A)$252,760
B)$110,840
C)$88,200
D)$47,570
Q2) Real options in capital budgeting can be classified.The classification that means that the project is delayed and can be termed "waiting to invest" is:
A)Investment timing option
B)Abandonment option
C)Shutdown option
D)Growth option
Q3) According to the profitability index criterion, a project is acceptable if its profitability index is
A)greater than 1 plus the cost of capital
B)greater than 0
C)greater than or equal to 1
D)greater than 1.1
Page 13
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Marvec needs to replace an extruder and two replacements look good.Extruder A costs $102,000 and has a 10 year life.Extruder B costs only $56,000 but its expected life is 6 years.Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years.If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities.
A)B, $564
B)B, $2,388
C)A, $1,646
D)A, $280
Q2) When two or more mutually exclusive alternative investments have , neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time.
A)unequal lives
B)unequal net cash flows
C)unequal net investments
D)a and b
Q3) How does the equivalent annual annuity approach solve the time discrepancy problem?
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Chapter 11: Capital Budgeting and Risk
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Q1) With the risk adjusted discount rate approach, in the context of total risk, the discount rates used in evaluating cash flows are determined .
A)objectively
B)subjectively
C)using regression analysis
D)objectively and by using regression analysis
Q2) The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the
A)sensitivity analysis method
B)simulation approach
C)net present value/payback method
D)risk-adjusted discount rate approach
Q3) The risk of an investment project is defined in terms of the potential of its returns.
A)certainty
B)size
C)variability
D)timing
Q4) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Q1) During the 1980s, the cost of capital for U.S.firms averaged about 3.3 percentage points higher than Japanese firms.During 1990 this disadvantage may have disappeared due to:
A)higher exports to the U.S.
B)higher real interest rates in Japan
C)larger shareholder interest
D)higher Japanese stock market
Q2) Northeast Airlines (NA) has a current dividend of $1.80.Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future.What is NA's cost of external equity if its stock can be sold to net $46 a share?
A)10.9%
B)11.2%
C)7.2%
D)21.0%
Q3) In considering the SML concept, the required returns for any individual security are dependent on certain values.List and discuss those values.
Q4) How is the marginal cost of the various component capital sources determined?
Q5) Firms can raise capital in two ways.Why is it that internal funding does not have a zero cost?
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Chapter 13: Capital Structure Concepts
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Q1) The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of price differences and make a profit is called:
A)option pricing
B)diversification
C)arbitrage
D)margining
Q2) There are many factors that influence a firm's business risk.List them.
Q3) Which of the following statements is true regarding the relationship between the firm's cost of debt and its capital structure (as measured by the debt ratio)?
A)The range of debt ratios where the cost of debt begins to increase rapidly varies by firm and industry, depending on the level of business risk.
B)The precise relationship between the cost of debt and the debt ratio is simple to determine.
C)The relationship is a saucer-shaped curve.
D)The relationship is determined by the static tradeoff theory.
Q4) What is the pecking order theory with regard to managerial preferences for financing alternatives?
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Chapter 14: Capital Structure Management in Practice
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Q1) Sulzar's capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion which will require $100 million of new capital.Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%.If Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point.
A)$45 million
B)$36 million
C)$5 million
D)$9 million
Q2) The degree of combined leverage is equal to the degree of operating leverage the degree of financial leverage.
A)added to B)divided by C)multiplied by D)subtracted from
Q3) What are the effects of leverage on shareholder wealth and the cost of capital?
Q4) In what way does management's willingness to assume risk impact the firm?
Q5) Explain the difference between short-run costs and long-run costs.
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Chapter 14: A: Capital Structure Management in Practice
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Q1) List the limitations of breakeven analysis:
Q2) What are the possible uses for breakeven analysis?
Q3) Breakeven analysis can be used:
A)when planning renovations
B)when planning expansions
C)when planning financial resources
D)when planning new product development
Q4) Another name for breakeven analysis is:
A)cost-volume-profit analysis
B)graphic analysis
C)EBIT-EPS analysis
D)degree of operating leverage
Q5) Breakeven analysis is normally performed for a planning period of:
A)five years
B)one year or less
C)ten years
D)one month
Q6) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Q7) How can a firm have more than one breakeven output point?
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Chapter 15: Dividend Policy
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Q1) The passive residual dividend policy asserts that
A)dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally.
B)dividends should be paid only when the firm has ready access to new equity markets
C)retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders
D)investment policy and dividend policy decisions should always be made independently
Q2) Which of the following would be considered an alternative dividend policy?
A)I only
B)II only
C)Both I and II
D)Neither I nor II
Q3) A passive residual dividend policy suggests that the firm will:
A)pay the same dollar amount of dividends every year
B)pay the same percentage of earnings in dividends every year
C)pay a dividend only after all viable investment projects have been exhausted
D)omit a dividend in the next period
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Net working capital is defined as:
A)total current assets
B)current assets minus current liabilities
C)total assets minus total liabilities
D)current assets plus current liabilities
Q2) All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt will tend to the variability (or risk) of the after-tax earnings of the firm.
A)large, decrease
B)small, increase
C)constant, lower
D)large, increase
Q3) Lenders normally feel that the relative risk associated with short-term debt is the risk associated with long- term debt.
A)lower than
B)equal to
C)higher than
D)none of these
Q4) Why is working capital so important to a firm's continued profitability?
Q5) Explain trade credit.
21
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Dupree Funds is considering the fees charges by two banks.First America charges a flat rate of $0.11 per payment and First Western requires a minimum compensating balance of $500,000, plus $0.05 per payment.What is the number of payments per year where the costs of the two banks will be equal? Assume Dupree's costs of funds is 9%.
A)281,250
B)750,000
C)900,000
D)409,091
Q2) A reason that banks would maintain a bank balance exceeding the compensating balance requirements is:
A)It reduces the opportunity cost.
B)It improves the firm's credit rating.
C)It alters the requirements imposed by the bank.
D)It reduces shortage costs.
Q3) Firms that have large multi-million dollar remittances use:
A)the Federal Reserve System
B)couriers
C)lockboxes
D)wire transfers
Page 22
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) Lengthening the credit period is likely to result in all of the following except
A)higher sales
B)more cash sales
C)larger investment in receivables
D)longer average collection period
Q2) Character, which is one of the traditional "five Cs" of credit analysis, refers to
A)the ability of the applicant to meet its financial obligations (i.e., liquidity and cash flow)
B)the general economic climate and its effect on the applicant's ability to pay
C)the financial strength of the applicant (i.e., net worth)
D)the willingness of the applicant to meet its financial obligations
Q3) Which of the following is not a cost related to the extension of credit to customers?
A)bad-debt losses
B)cash discounts
C)quantity discounts
D)collection costs
Q4) In trying to collect on past-due accounts, the firm may use several methods.List them.
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) Ajax Capital has determined the amount to be amortized on an extruder is $540,000.If the required rate of return is 14%, what will be the total interest received over the life of the lease given that lease payments will be made at the beginning of each of the 7 years of the lease agreement? Assume a marginal tax rate of 40%.
A)$233,269
B)$748,786
C)$811,080
D)$110,467
Q2) Prime Care has approached the leasing department of First City Bank to arrange lease financing for a $1.2 million CAT scanner.The economic life of the scanner is estimated to be 10 years.The estimated salvage value at the end of 10 years is $0.First City plans to depreciate the scanner on a straight-line basis over 10 years.If First City charges a beginning of the year lease payment of $255,395, what after-tax rate of return will the bank earn on the lease? Assume a marginal tax rate of 40%.
A)4.7%
B)16.8%
C)13%
D)40%
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Chapter 20: Financing with Derivatives
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Q1) The Coatesville Company has decided to sell additional common stock through a rights offering.The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering.Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares.The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share.Determine the theoretical value of the right for the rights on case.
A)$0.556
B)$0.455
C)$0.50
D)$0.625
Q2) In calculating fully diluted earnings per share, earnings must be adjusted for:
A)interest saved.
B)the number of convertible securities in the marketplace.
C)the number of executive bonus packages that could impact the firm's earnings.
D)the company's credit rating.
Q3) Explain how conversion of a convertible security affects earnings and how does a firm handle this on its financial statements?
Q4) Why would a company issue convertible securities instead of straight bonds?
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Chapter 20: A: Financing with Derivatives
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Q1) Bond occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
A)redemption
B)retirement
C)recall
D)refunding
Q2) In bond refunding analysis the is believed to be the most appropriate discount rate.
A)after-tax cost of new debt
B)firm's marginal cost of capital
C)weighted average cost of capital
D)both b and c
Q3) In considering the bond refunding analysis, which of the following statements is/are correct?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q4) Why would a corporation consider bond refunding?
Q5) Why is the after-tax cost of debt used in bond refunding analysis?
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Chapter 21: Risk Management
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Q1) Which of the following statements about hedging of business risks by investors is/are correct?
I.Operational information about companies is widely available and investors find it relatively simple to hedge business risk.
II.Investors have the necessary capital required to implement hedging strategies and do so consistently.
A)Only statement I is correct
B)Only statement II is correct
C)Both statement I and II are correct
D)Neither statement I nor II is correct
Q2) Acquisition of additional information can be accomplished by all of the following EXCEPT:
A)Employing individuals or firms with the needed expertise
B)Test-marketing
C)Paying to have new issues of bonds "rated"
D)Changing the location of the distributorship
Q3) List some nonhedging risk management strategies.
Q4) What options does the buyer of a futures contract have at the time the futures contract matures?
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Chapter 22: International Financial Management
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Q1) The international Fisher effect theory states that differences in interest rates between two countries will be offset by equal but opposite changes in
A)the future spot rate
B)the future interest rate
C)the American dollar
D)the euro
Q2) Which of the following trade policies will tend to decrease the supply of the country's currency in the foreign exchange market?
A)imposition of tariffs
B)imposition of export quotas
C)financing exports with low interest loans
D)imposition of tariffs and export quotas
Q3) What are two hedging techniques that a U.S.company might use to protect itself against foreign exchange risk with regard to transaction exposure?
Q4) Name the factors that affect exchange rates.
Q5) How does a firm manage economic exposure due to changes in exchange rates?
Q6) How do market forces support the relative purchasing power parity?
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Chapter 23: Corporate Restructuring
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Q1) The accounting method used in most mergers is the method.
A)pooling of interests
B)purchase
C)consolidation
D)merger
Q2) In analyzing a merger the is the number of the acquiring company shares received per share of acquired company stock owned.
A)assignment
B)composition
C)price-purchase ratio
D)exchange ratio
Q3) An example of a passive institutional investor is a:
A)pension fund
B)private equity investor
C)parent company
D)third party administrator
Q4) What are some informal alternatives for salvaging a failing business?
Q5) How does a joint venture differ from a holding company?
Q6) Explain a form of business combination called a holding company and how the combination is achieved.
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