Financial Decision Making Exam
Bank
Course Introduction
Financial Decision Making explores the frameworks and analytical tools essential for making effective financial choices in both personal and organizational contexts. The course covers fundamental concepts in finance, such as time value of money, risk and return, capital budgeting, valuation, financial statement analysis, and the impact of financial markets on decision-making. Students will apply quantitative methods and critical thinking to evaluate investment opportunities, assess financing options, and make informed strategic decisions. Case studies and real-world scenarios are used to bridge theory and practice, preparing students to address complex financial problems and optimize resource allocation in dynamic environments.
Recommended Textbook Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The financial manager prepares financial statements that recognize revenue at the point of sale and expenses when incurred.
A)True
B)False
Answer: False
Q2) In partnerships, a partner can readily transfer his/her wealth to other partners.
A)True
B)False
Answer: False
Q3) The primary economic principle used in managerial finance is
A) supply and demand.
B) the liquidity trap.
C) the crowding out effect.
D) marginal cost-benefit analysis.
Answer: D
Q4) Dividend payments change directly with changes in earnings per share.
A)True
B)False
Answer: False
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) In general, most corporate capital gains are taxed at ________ tax rate.
A) a 46 percent
B) the ordinary
C) a 28 percent
D) a 30 percent
Answer: B
Q2) The primary risk of mortgage-backed securities is
A) that the prices of housing will go down.
B) that the prices of housing will increase.
C) that the government will not be able to meet the guarantees on the cash flows.
D) that homeowners may not be able to, or choose not to, repay their loans.
Answer: D
Q3) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market, whereas the 1934 Act deal with the regulations governing the transactions in the secondary market.
A)True
B)False
Answer: True
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4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive
A) general and administrative expenses.
B) cost of goods sold.
C) dividend payments.
D) principal payments.
Answer: A
Q2) The average age of inventory can be calculated as inventory divided by 365.
A)True
B)False
Answer: False
Q3) The ________ ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.
A) debt
B) net profit margin
C) return on total assets
D) times interest earned
Answer: D
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) A corporation
A) must use the same depreciation method for tax and financial reporting purposes.
B) must use different depreciation methods for tax and financial reporting purposes.
C) may use different depreciation methods for tax and financial reporting purposes.
D) must use different (than for tax purposes), but strictly mandated, depreciation methods for financial reporting purposes.
Q2) Because the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.
A)True
B)False
Q3) The ending cash balance for March is ________. (See Table 4.3)
A) $ 250
B) $6,750
C) $2,500
D) $ 500
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Chapter 5: Time Value of Money
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Sample Questions
Q1) A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?
Q2) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment declines over the life of the loan.
A)True
B)False
Q3) A generous benefactor to the local ballet plans to make a one-time endowment which would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?
A) $ 300,000
B) $3,000,000
C) $ 750,000
D) $1,428,571
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) The liquidity preference theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.
A)True
B)False
Q2) The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to
A) assure the lender that the borrowed funds are put to the use for which they were intended.
B) limit the amount of fixed-payment obligations.
C) ensure that a cash shortage does not cause an inability to meet current obligations.
D) prevent liquidation of assets through large salary increases of key employees.
Q3) A yield curve that reflects relatively similar borrowing costs for both short- and long-term loans is called a normal yield curve.
A)True
B)False
Q4) Calculate the current value of Bond M. (See Table 6.2)
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.
A)True
B)False
Q2) If a market is truly efficient, investors should not waste their time trying to find and capitalize on mispriced securities.
A)True
B)False
Q3) A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. The preferred stockholders must be paid ________ prior to paying the common stockholders.
A) $ 0/share
B) $12/share
C) $24/share
D) $36/share
Q4) Calculate the estimated dividend for 2004. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) If a person requires greater return when risk increases, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.
Q2) Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.
A)True
B)False
Q3) Even if assets are not negatively correlated, the lower the positive correlation between them, the lower the resulting risk.
A)True
B)False
Q4) Diversified investors should be concerned solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The cost of capital is a static concept; it is not affected by economic and firm-specific factors such as business risk and financial risk.
A)True
B)False
Q2) A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.
A)True
B)False
Q3) The firm's after-tax cost of debt is ________. (See Table 9.1)
A) 3.25 percent
B) 4.6 percent
C) 8 percent
D) 8.13 percent
Q4) A tax adjustment must be made in determining the cost of
A) long-term debt.
B) common stock.
C) preferred stock.
D) retained earnings.
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should
A) accept both if the cost of capital is at most 15 percent.
B) accept only Z if the cost of capital is at most 15 percent.
C) accept only X if the cost of capital is at most 15 percent.
D) none of the above
Q2) If a project's payback period is greater than the maximum acceptable payback period, we would accept it.
A)True
B)False
Q3) ________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.
A) Recapitalizing assets
B) Capital budgeting
C) Ratio analysis
D) Restructuring debt
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) An asset was purchased three years ago for $100,000 and can be sold for $40,000 today. The asset has been depreciated using the MACRS 5-year recovery period and the firm pays 40 percent taxes on both ordinary income and capital gain. (a) Compute recaptured depreciation and capital gain (loss), if any. (b) Find the firm's tax liability.
Q2) Given the information in Table 11.4, compute the initial investment.
Q3) Companies involved in international capital budgeting projects can minimize political risks by structuring the investment as a joint venture and selecting a well-connected local partner.
A)True
B)False
Q4) In evaluating a proposed project, incremental operating cash inflows are relevant cash flows.
A)True
B)False
Q5) Given the information in Table 11.4 and 15 percent cost of capital, (a) compute the net present value. (b) Should the project be accepted?
Q6) Calculate the tax effect from the sale of the existing asset. (See Table 11.1)
Page 13
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Despite their focus on total risk, RADRs are often used in practice.
A)True
B)False
Q2) The breakeven cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.
A)True
B)False
Q3) Sensitivity analysis is a statistically based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.
A)True
B)False
Q4) Even though a business firms can be viewed as a portfolio of assets, firms are not rewarded for selecting a diversified portfolio of assets because investors can more efficiently diversify away unsystematic risk on their own.
A)True
B)False
Q5) Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)
Q6) Which project do you recommend? (See Table 12.4)
Page 14
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) A firm has fixed operating costs of $253,750, a sales price per unit of $100, and a variable cost per unit of $65. The firm's operating breakeven point in dollars is
A) $725,000.
B) $700,000.
C) $906,250.
D) $390,385.
Q2) The base level of sales must be held constant to compare the total leverage associated with different levels of fixed costs.
A)True
B)False
Q3) As financial leverage increases, the cost of debt initially remains constant and then rises, while the cost of equity always rises.
A)True
B)False
Q4) Operating leverage is concerned with the relationship between the firm's sales revenue and its operating expenses.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.
A)True
B)False
Q2) By purchasing shares through a firm's dividend reinvestment plan (or DRIP), shareholders typically can acquire shares at a value that is above the prevailing market price.
A)True
B)False
Q3) When purchasing outstanding shares of common stock a firm can utilize all of the following methods EXCEPT
A) a purchase on the open market at market prices.
B) a tender offer at varying prices.
C) a tender offer at a specified price.
D) by purchasing a large block on a negotiated basis.
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Page 16
Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an
A) decrease of 30 days in the cash conversion cycle.
B) increase of 15 days in the cash conversion cycle.
C) decrease of 15 days in the cash conversion cycle.
D) increase of 30 days in the cash conversion cycle.
Q2) ________ are funds denominated in U.S. dollars and deposited in banks located outside the United States.
A) Negotiable certificates of deposit
B) Eurodollar deposits
C) Banker's acceptances
D) Money market mutual funds
Q3) The philosophy of the ________ is that the firm would have only work-in-process inventory.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) red-line method
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate.
A) lower than
B) the same as C) unrelated to D) higher than
Q2) As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paid every two weeks instead of every week. A major firm employing hundreds of clerical workers had a weekly payroll of $1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession was to delay clearing time by one week. Due to the concession, the firm
A) realized an annual loss of $120,000.
B) realized an annual savings of $120,000.
C) increased its cash cycle.
D) decreased its cash turnover.
Q3) With a floating-rate note, the interest rate on the note changes
A) when the risk level of the borrower changes.
B) when the prime rate changes.
C) when the demand for loans changes.
D) when bank profits change.
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) The purchaser of a convertible issue sacrifices a portion of his or her interest return
A) to raise temporarily cheap funds.
B) due to the reduced risk of default.
C) when the call feature is exercised.
D) for the potential opportunity to become a common shareholder in the future.
Q2) The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.
A)True
B)False
Q3) In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.
A)True
B)False
Q4) Diluted earnings per share (EPS) are found by adjusting basic EPS for the impact of converting all convertibles and exercising all warrants and options that would have diluting effects on the firm's earnings.
A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Q1) Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.
A)True
B)False
Q2) The result of spin-off to the parent company is
A) additional stock to the parent.
B) additional cash from the sale.
C) additional debt by the parent.
D) no additional cash or stock to the parent.
Q3) Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, the donation of a unit to a charity, and the liquidation of assets.
A)True
B)False
Q4) The goals of divestiture include all of the following EXCEPT
A) raising funds.
B) focusing operations.
C) enhancing profitability.
D) expanding operations.
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) FASB No. 52 requires U.S. multinationals first to convert the financial statement accounts of foreign subsidiaries into their functional currency and then to translate the accounts into the parent firm's currency using the all-current-rate method.
A)True
B)False
Q2) Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent. What are the funds available to the parent MNC if no tax credits are allowed?
A) $624,750
B) $425,250
C) $257,250
D) $735,000
Q3) The forward exchange rate is the rate of exchange between two currencies on any given day.
A)True
B)False
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