Financial Decision Making Exam
Bank
Course Introduction
Financial Decision Making is a comprehensive course that explores the theories, concepts, and practical tools necessary for analyzing and making effective financial decisions within organizations. The course covers fundamental topics such as financial statement analysis, capital budgeting, risk assessment, valuation of assets and projects, and the use of financial data in strategic planning. Students will learn to apply quantitative and qualitative methods to evaluate investment opportunities, allocate resources, and understand the impact of financial decisions on business performance. By blending case studies, real-world examples, and financial modeling, the course equips learners with the analytical skills and decision-making frameworks essential for success in finance-related professions.
Recommended Textbook
Introduction to Corporate Finance 3rd Edition by John Graham
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Chapter 1: The Scope of Corporate Finance
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Q1) Which law did Congress pass in 2002 to enforce ethical behavior in corporate finance?
A) The Jobs and Growth Relief Reconciliation Act
B) The Financial Services Modernization Act
C) The Patriot Act
D) The Sarbanes-Oxley Act
Answer: D
Q2) What is the proper goal for management of a firm?
A) Maximize shareholder wealth
B) Maximize net income or earnings
C) Maximize sales revenue
D) Minimize expenses
Answer: A
Q3) Which of the following is NOT considered a weakness of the sole proprietorship?
A) Limited life
B) Unlimited personal liability
C) Simplicity
D) Limited access to capital
Answer: C
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Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) Which of the following statements is FALSE?
A) The Notes to Financial Statements provide little information that is relevant to professional security analysts.
B) The Notes to Financial Statements provide additional information about a firm,including employee compensation plans,revenue recognition practices and leases.
C) The Notes to Financial Statements provide detailed explanatory information that is keyed to various accounts on the financial statements.
D) all of the above statements are true
E) both (a)and (c)are false
Answer: A
Q2) You have the following information about a company: quick ratio = 0.85,inventory = $125,000 and current assets = $375,000.What is the company's current ratio?
A) 0.85
B) 1.05
C) 2.56
D) 1.28
Answer: D
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Chapter 3: The Time Value of Money
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Q1) Prudent Policy Life Insurance Co.offers a 10-year term life insurance policy with a $250,000 benefit and annual premiums of $200,paid at the BEGINNING of each year.If Prudent can earn 8% on invested capital,what is the present value to the firm of the premiums from one policy,assuming the policy holder outlives the policy term?
A) $1,120
B) $1,342
C) $1,449
D) $1,852
Answer: C
Q2) The ratio of interest to principal repayment on an amortizing loan
A) increases as the loan gets older.
B) decreases as the loan gets older.
C) remains constant over the life of the loan.
D) changes according to the level of market interest rates during the life of the loan.
Answer: B
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Chapter 4: Valuing Bonds
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Q1) A one-year bond offers a yield of 6% and a two year bond offers a yield of 7.5%.Under the expectations theory what should be the yield on a one year bond next year?
A) 13.50%
B) 4.52%
C) 7.38%
D) 9.02%
Q2) A bond is priced such that it has a 9% yield to maturity.However,inflation is expected to be 2% per year over the remaining life of the bond.What is the real return for this investment?
A) 4.50%
B) 6.86%
C) 7.00%
D) 9.00%
Q3) Which type of bond has the highest daily trading volume in our economy?
A) Treasury bonds
B) Agency bonds
C) Corporate bonds
D) Municipal bonds
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Chapter 5: Valuing Stocks
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Q1) Which of the following securities poses the greatest financial risk for the investor?
A) common equity
B) preferred equity
C) debt
D) convertible debt
Q2) Which of the following activities is not one of the three principal lines of business for U.S.-based investment banks?
A) Working capital management
B) Corporate finance
C) Trading
D) Asset management
Q3) The market value of Bulldog Industries debt and preferred stock is $934 million.If the firm has a weighted average cost of capital of 10%,find the equity value of the firm's stock.The firm has 50 million shares of stock outstanding.(assume that we are at January 1,2004 )
A) $14.63
B) $16.23
C) $17.03
D) $22.63
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Chapter 6: The Trade-Off Between Risk and Return
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Q1) You purchased stock of Blue McBrushes Corp one year ago for $85 and generated a total return of 20% during that time.If you just sold the stock for $89.50,then what were the total dividends that you received during the year?
A) $12.50
B) $12.73
C) $13.18
D) none of the above
Q2) What is the average return of a portfolio that has 45% invested in stock A,35% invested in stock B and the rest invested in stock C?
A) 9.92%
B) 11.62%
C) 10.62%
D) 12.48%
Q3) What is one of the most important lessons from capital market history?
A) Risk does not matter.
B) There is a positive relationship between risk and return.
C) You are always better off investing in stock.
D) T-bills are the highest yielding investment.
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Chapter 7: Risk,return,and the Capital Asset Pricing Model
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Q1) Suppose Sarah can borrow and lend at the risk free-rate of 3%.Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset?
A) portfolio with a standard deviation of 15% and an expected return of 12%
B) portfolio with a standard deviation of 19% and an expected return of 15%
C) portfolio with a standard deviation of 25% and an expected return of 18%
D) portfolio with a standard deviation of 12% and an expected return of 9%
Q2) A particular asset has a beta of 1.2 and an expected return of 10%.The expected return on the market portfolio is 13% and the risk-free is 5%.The stock is
A) overpriced
B) underpriced
C) appropriately priced
D) Cannot tell from the given information
Q3) Given Exhibit 7-2,what is the expected return?
A) 10.75%
B) 13.00%
C) 16.00%
D) 17.75%
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Q1) A project may have multiple IRRs when
A) the project generates an alternating series of net cash inflows and outflows
B) the project generates an immediate cash inflow followed by cash outflow
C) the project has a negative NPV
D) the project is of considerably large scale
Q2) The payback method:
A) fails to explicitly consider the time value of money.
B) is the amount of time it takes for a project to recoup its profits.
C) is the best method for evaluating complex projects.
D) is never used by businesses today.
Q3) Delta Pharmaceuticals has 200 million shares outstanding with a current market price of $30 per share.Its stock rose to $32 on the news that Delta Pharmaceuticals' long-awaited new drug Zentac is to hit the market next month.What's the market's consensus of the NPV that the new drug will generate for Delta Pharmaceuticals?
A) $400 million
B) $6,400 million
C) $6,000 million
D) None of the above
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Chapter 9: Cash Flow and Capital Budgeting
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Q1) Refer to DSSS Corporation.What is the NPV of the project?
A) $14.732
B) $12,986
C) $19,983
D) -$19,983
Q2) Refer to DSSS Corporation.What is the operating cash flow for year 1?
A) $54,797
B) $64,798
C) $70,803
D) $10,487
Q3) Refer to FAR Corporation.What is the IRR of the project?
A) 12.01%
B) 8.74%
C) 5.92%
D) 4.78%
Q4) Cash Flows that occur if and only if a project is accepted are:
A) sunk costs.
B) terminal costs.
C) incremental cash flows.
D) current cash flows.
11
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Chapter 10: Risk and Capital Budgeting
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Q1) Refer to Running Shoes,Inc.What is the cost of equity?
A) 9.20%
B) 9.60%
C) 10.40%
D) 11.60%
Q2) You are considering the purchase of production volume of 100,000 widgets per year.You can purchase either a single 100,000 widget per year machine that costs $1,000,000 or first buy a 50,000 per year machine and then if sales volume permits,purchase another machine later.If widget production volume costs the same per unit to produce,what should the cost of the 50,000 per year machine be (to you)if there is a real option to expand production?
A) less than $500,000
B) $500,000
C) greater than $500,000
D) it is impossible to tell from the information given
Q3) Which statement is true about a firm that earns ZERO economic profit?
A) The firm is competing in a non-competitive environment.
B) The market must have high entry barriers to other firms.
C) The NPV of projects the firm considers equals zero.
D) The accounting income for projects equals zero.
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Chapter 11: Raising Long-Term Financing
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Q1) What is the total cost (underwriting fee and underpricing)of this issue to Sea Grove Beach Corporation?
A) $6.30 million
B) $16.80 million
C) $106.80 million
D) $125.00 million
Q2) Which of the following factors might be most important for an entrepreneur that is considering an IPO in an industry where a firm's strategy is its most important asset.
A) the use of stock as a compensation vehicle
B) the investment banking fee
C) the disclosure requirements of publicly traded firms
D) all of the above are most import to such a firm
Q3) If ABC's stock price closes at $39.00 the day before the offering,calculate the total cost of the seasoned equity offering to ABC's existing stockholders as a percentage of the offering proceeds.
A) 16.23%
B) 18.51%
C) 20.10%
D) 20.40%
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Chapter 12: Capital Structure
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Q1) Roy's Toy,Inc.currently has no debt outstanding.Its current cost of equity is 12% and the current value of the company is $20,000,000.Roy is proposing to finance 1/4 of its assets with debt at a cost of 8% per annum.What will be Roy's cost of levered equity if things go as planned? Ignore any tax effects.
A) 12.00%
B) 13.00%
C) 13.33%
D) none of the above
Q2) What is the value of Bavarian Brew before restructuring? Assume a corporate tax rate of 34%.
A) $5,000,000
B) $500,000
C) $3,300,000
D) $1,000,000
Q3) Which of the following is considered a direct cost of bankruptcy?
A) diversion of management's time
B) constrained capital investment spending
C) lost sales
D) none of the above
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Chapter 13: Long-Term Debt and Leasing
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Q1) Refer to BLEC.What is the after tax cash flow for the first year from a purchase of the machine?
A) $31,583
B) $21,167
C) $19,515
D) $25,000
Q2) Refer to Loose Cannon Co.What is the NPV of the refunding decision?
A) $3,654,164
B) $5,356,375
C) $1,224,292
D) $8,614,375
Q3) Bonds that received investment-grade ratings when first issued but later fell to junk status are known as:
A) disgraced stars.
B) shamed debt.
C) fallen angels.
D) dead wood.
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Chapter 14: Payout Policy
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Q1) Smith Enterprises reports earnings per share for 2004 of $3.75 and dividends per share for the same year of $1.65.What percentage of earnings will be kept in the company as retained earnings?
A) 44%
B) 56%
C) 32%
D) 68%
Q2) If transaction costs are significant,then which of the following might be the effect on cash dividends and share repurchases?
A) dividends might be more likely to be paid from the investors preference argument B) dividends might be less likely to be paid from the firm's perspective of raising capital
C) dividend choices are always relevant
D) none of the above
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Chapter 15: Financial Planning
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Q1) The growth rate at which a company can grow without issuing new shares of common stock while maintaining a constant total asset turnover and equity multiplier is called a(n)
A) internal growth rate
B) sustainable growth rate
C) optimal growth rate
D) maximal growth rate
Q2) If a company has a liabilities to equity ratio of 0.5,then its assets to equity ratio is
A) 0.5
B) 1.0
C) 1.5
D) 2.0
Q3) What is the value of the Bavarian Brew's accounts payable at the end of February? Assume the company had sales of $490 in December.
A) $688.50
B) $738.50
C) $638.50
D) $869.00
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Chapter 16: Cash Conversion, inventory, and Receivables Management
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Q1) The operating cycle is the length of time from the receipt of inventory until the A) beginning of the cash conversion cycle.
B) end of the cash conversion cycle.
C) payment of accounts payable.
D) collection of cash from sales.
Q2) Bavarian Brew has an average age of inventory of 35 days,an average collection period of 27 days and a cash conversion cycle of 16 days.What is the company's average payment period?
A) 46 days
B) 62 days
C) 16 days
D) 19 days
Q3) Should BTI relax its credit standards?
A) Yes,the forecast is for a $496,788 net gain.
B) Yes,the forecast is for a $65,538 net gain.
C) No,the forecast predicts a $243,750 net loss.
D) No,the forecast predicts a $609,462 net loss.
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) Refer to Smith Enterprise Credit line (w/o comp).What is the change in your EBR if you only borrow $2,000,000 instead of $3,250,000?
A) increases by .44%
B) decreases by .44%
C) does not change
D) increases by .78%
Q2) The difference between a lockbox system and a mail-based system is
A) that a mail-based system is more secure.
B) that a lockbox system is really a post office box that is emptied by the firm's bank. C) that a lockbox system requires a larger in-house collection system for the firm. D) none of the above.
Q3) What is the money market yield for a one-year treasury bill that is priced at a 4% discount?
A) 3.83%
B) 4%
C) 4.17%
D) 4.22%
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Chapter 18: International Financial Management
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Q1) If the law of one price holds and the price of an apple in the U.S.is $1.50 while the price of an apple in Japan is ¥174.00,then what should the spot exchange rate for ¥/$ be?
A) .0086
B) .5747
C) 116.00
D) none of the above
Q2) The spot rate for the U.S.dollar relative to the Euro is $1.47/ .The spot rate for the U.S.dollar relative to the Canadian dollar is $0.765/C$.What is the cross exchange rate for the C$ and ?
A) C$1.922/
B) 1.922/C$
C) C$0.5204/
D) 0.5204/C$
Q3) The risk that movements in exchange rates will adversely affect the value of a particular transaction.
A) Transactions exposure
B) Translation exposure
C) Economic exposure
D) Political Risk
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Chapter 19: Options
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Q1) If a company is wanting to lessen the cost of a new security by imbedding a valuable option in the security,then the company is most likely to issue
A) common stock.
B) debt.
C) convertible debt.
D) preferred stock.
Q2) You find that an investor purchases a put option on shares of Company Z stock.What is the most likely reason that an investor would make such a purchase?
A) the investor believes that Company Z is an undervalued company
B) the investor believes that Company Z in an overvalued company
C) the investor would like to speculated that Company Z's stock price will randomly increase
D) none of the above
Q3) Which of the following would affect the premium of a call option?
A) interest rates
B) dividend yield
C) stock price volatility
D) all of the above
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) John Smith seeks $7.5 million from a VC fund.John and the VC agree that the company should be ready to go public in 4 years.At that time the company should have a market capitalization of $146.75 million.If the VC requires a 54% return on their investment,what is the fraction of the firm that the VC will receive for its $7.5 million investment?
A) 28.74%
B) 71.26%
C) 54.00%
D) 38.57%
Q2) Which of the following had a significant impact on the change that the venture capital industry went through in the early 1970's?
A) the lowered top personal tax rate on capital gains from 35% to 28%
B) the adoption of the "Prudent Man Rule"in 1979
C) the restructuring of the economy in 1975
D) a and b
Q3) Venture capital funds typically use stage financing in order to
A) ensure that the entrepreneur is disciplined in goal achievement.
B) to minimize risk.
C) to retain an option for funding future developmental stages of the firm.
D) all of the above.
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) What is the value of the transaction at the time of the offer for Milner Manufacturing?
A) $87,500,000
B) $33,000,000
C) $50,000,000
D) $57,750,000
Q2) Refer to Exhibit 21-1.What is the HHI of this industry?
A) 2,088
B) 1,645
C) 2,495
D) 1,325
Q3) The suggestion that poorly monitored managers will pursue mergers to maximize their corporation's asset size because managerial compensation is usually based on firm size is called
A) the managerialism theory of managers.
B) the concept of unintended consequences.
C) the untrustable manager theory of managers.
D) none of the above.
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Chapter 22: Bankruptcy and Financial Distress
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Q1) Which party is responsible for filing a reorganization plan to the court in a case of bankruptcy?
A) the shareholders
B) the debtholders
C) the debtor in possession
D) all of the above
Q2) The legal mechanism by which inefficient firms may leave the market is
A) economic darwinism.
B) bankruptcy.
C) liquidation.
D) none of the above.
Q3) A simplified form of restructuring for farmers
A) Chapter 9
B) Chapter 12
C) Chapter 13
D) Chapter 15
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Chapter 23: Risk Management
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Q1) Suppose the spot exchange rate is 0.5491 pounds per U.S.dollar,while the risk-free borrowing rates are 4% in Britain and 3% in the United States.If the current forward exchange rate is also 0.5491 pounds per dollar,what opportunity exists?
A) Arbitrage by borrowing in Britain today,and selling pounds forward.
B) Arbitrage by borrowing in Britain today,and selling dollars forward.
C) Arbitrage by borrowing in the United States today,and selling pounds forward.
D) Arbitrage by borrowing in the United States today and selling dollars forward.
Q2) Suppose the spot exchange rate is 0.5491 pounds per U.S.dollar,while the risk-free borrowing rate is 4% in Britain.If the "fair" exchange rate is 0.5544 pounds per U.S.dollar,what is the risk-free borrowing rate in the United States?
A) 5%
B) 4%
C) 3%
D) 2%
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