Financial Decision Making
Exam Bank
Course Introduction
Financial Decision Making equips students with the essential principles and tools necessary to analyze and make sound choices regarding the allocation, management, and investment of financial resources within organizations. The course covers key concepts such as time value of money, risk and return, capital budgeting, financial statement analysis, and cost of capital. Students will explore decision-making frameworks and quantitative techniques used in areas like capital structure, working capital management, and dividend policy. Through case studies and problem-solving exercises, learners develop the skills to assess financial alternatives, interpret financial data, and understand the impact of their choices on organizational objectives and value creation.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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20 Chapters
2091 Verified Questions
2091 Flashcards
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Page 2
Chapter 1: Getting Started-Principles of Finance
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87 Verified Questions
87 Flashcards
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Sample Questions
Q1) Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?
A)Profit maximization
B)Risk minimization
C)Maximization of the total market value of the firm's common stock
D)None of the above
Answer: C
Q2) In terms of organizational costs,which of the following sequences is generally correct,moving from lowest to highest cost?
A)General partnership,sole proprietorship,limited partnership,corporation
B)Sole proprietorship,general partnership,limited partnership,corporation
C)Corporation,limited partnership,general partnership,sole proprietorship
D)Sole proprietorship,general partnership,corporation,limited partnership
Answer: B
Q3) Limited partners may actively manage the business.
A)True
B)False
Answer: False
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3
Chapter 2: Firms and the Financial Market
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35 Flashcards
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Sample Questions
Q1) Bonds are less risky than are stocks because their return is more predictable.
A)True
B)False
Answer: True
Q2) Explain how securities markets provide a link between the corporation and investors.
Answer: First,the corporation sells its securities,which can be common stock,preferred stock,or debt.Since the firm receives money directly from these sales,these are primary market transactions.The firm then invests the money it receives,with the corporate purpose of maximizing the value of its shares of common stock.The corporation must then pay back its investors,and pay taxes.Any other monies can be reinvested into the firm.When these securities are traded on the market,these are secondary market transactions,and by making these trades,investors determine the market value of the securities.
Q3) A company has the option to pay bond interest or not.
A)True
B)False
Answer: False
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4
Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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63 Verified Questions
63 Flashcards
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Sample Questions
Q1) How does "free cash flow" differ from net profit?
A)It is determined by accrual basis accounting.
B)It takes into consideration a firm's ongoing investment in working capital and fixed assets.
C)It ignores depreciation and taxes.
D)It is less expensive.
Answer: B
Q2) Your firm has the following balance sheet statement items: total current liabilities of $805,000;total assets of $2,655,000;fixed and other assets of $1,770,000;and long-term debt of $200,000.What is the amount of the firm's net working capital?
A)$25,000
B)$325,000
C)$770,000
D)$80,000
Answer: D
Q3) The interest payments on corporate bonds are tax-deductible.
A)True
B)False
Answer: True
5
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Financial ratios comprise the principal tool of financial analysis since they can be used to answer a variety of questions regarding a firm's financial condition.
A)True
B)False
Q2) Wireless Communications has a total asset turnover of 2.66,total liabilities of $1,004,162,and sales revenues of $7,025,000.What is Wireless's debt ratio?
A)38.0%
B)14.3%
C)26.7%
D)81.1%
Q3) S.M. ,Inc.had total sales of $400,000 in 1996 (70 percent of its sales are credit).The company's gross profit margin is 10%,its ending inventory is $80,000,and its accounts receivable is $25,000.What amount of funds can be generated by the company if it increases its inventory turnover ratio to 10.0 and reduces its average collection period to 20 days?
Q4) Ratios are used to standardize financial information.
A)True
B)False
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Page 6
Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) A bank pays a quoted annual (nominal)interest rate of 4.25%,compounded daily (365-day year).What is the annual percentage yield (APY)?
A)4.25%
B)5.56%
C)4.75%
D)6.20%
E)4.34%
Q2) How much money must be put into a bank account yielding 5.5% (compounded annually)in order to have $250 at the end of five years (round to nearest $1)?
A)$237
B)$191
C)$187
D)$179
Q3) The present value of a single sum:
A)increases as the discount rate decreases.
B)decreases as the discount rate decreases.
C)increases as the number of discount periods increases.
D)increases as the discount rate increases.
E)none of the above.
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) If you put $10 in a savings account at the beginning of each year for 11 years,how much money will be in the account at the end of the 11th year? Assume that the account earns 11%,and round to the nearest $100.
A)$220
B)$200
C)$190
D)$180
Q2) You buy a race horse,which has a winning streak for four years,bringing in $500,000 per year,and then it dies of a heart attack.If you paid $1,518,675 for the horse four years ago,what was your annual return over this four-year period?
A)8%
B)33%
C)18%
D)12%
Q3) Consider an investment that has cash flows of $500 the first year and $400 for the next four years.If your opportunity cost is 10%,how much is this investment worth to you?
Q4) If your opportunity cost is 12%,how much will you pay for a bond that pays $100 per year forever?
Page 8
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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44 Verified Questions
44 Flashcards
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Sample Questions
Q1) Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.
A)True
B)False
Q2) Riskier investments have traditionally had lower returns than less risky investments have had.
A)True
B)False
Q3) If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.
A)True
B)False
Q4) The holding period return is always positive.
A)True
B)False
Q5) Treasury Bills have less default risk than do Government Bonds.
A)True
B)False
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The market rewards assuming additional unsystematic risk with additional returns.
A)True
B)False
Q2) The expected return from investing in the asset is:
A)9.00%.
B)9.35%.
C)10.00%.
D)10.55%.
Q3) Given the capital asset pricing model,a security with a beta of 1.5 should return ________,if the risk-free rate is 6% and the market return is 11%.
A)13.5%
B)14.0%
C)14.5%
D)15.0%
Q4) A security with a beta of zero has a required rate of return equal to the overall market rate of return.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) What elements determine what the yield to maturity will be for a bond?
Q2) Six years ago,Colt,Inc.sold an issue of 30-year,$1,000 par value bonds.The coupon rate of 5.25% is payable annually.Investors presently require a rate of return of 8.375%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.
A)$1,050
B)$932
C)$681
D)$1,111
Q3) The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.
A)True
B)False
Q4) Pursuant to the Fisher Effect,the real interest rate is exactly equal to the nominal interest rate less the rate of inflation
A)True
B)False
Q5) Explain why an increase in the inflation rate will cause the yield to maturity on a bond to increase.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Acme Consolidated has a return on equity of 12%.If Acme distributes 60% of earnings as dividends,then we would expect the common shareholders' investment in the firm and the value of the common stock to grow by:
A)4.80%.
B)7.20%.
C)12%.
D)6%.
Q2) The P/E ratio is the market price of a share of stock divided by book equity per share.
A)True
B)False
Q3) An example of a primary market transaction is:
A)a new issue of stock by Evergreen Solar.
B)a purchase of Microsoft stock on Nasdaq.
C)Target repurchasing some its own stock from an investor.
D)a sale of IBM stock on the NYSE.
Q4) Stock valuation is more precise than bond valuation as stock cash flows are more certain.
A)True
B)False
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000,$45,000,$50,000,$55,000,$60,000.The salvage value of the vehicle will be $25,000.Assume that the vehicle is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1. )
A)$7,390
B)$6,048
C)$6,780
D)$19,483
Q2) Briefly describe the actual capital budgeting methods of large U.S.corporations.
Q3) Recent surveys of the CFOs of large U.S.companies rank the popularity of major capital budgeting methods in which order?
A)IRR,NPV,Payback,Discounted Payback,Profitability Index
B)Payback,Discounted Payback,Profitability Index,IRR,NPV
C)NPV,IRR,Profitability Index,Discounted Payback,Payback
D)NPV,IRR,Payback,Discounted Payback,Profitability Index
Q4) Distinguish between revenue enhancement investments,cost-reduction investments,and mandated investments.
Q5) Why is it so difficult for firms to find good investment ideas?
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Chapter 12: Analyzing Project Cash Flows
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112 Flashcards
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Sample Questions
Q1) Which of the following cash flows should be included as incremental costs when evaluating capital projects?
A)Overhead expenses that are directly related to a project
B)Interest expense that is directly related to the financing of a project
C)Sunk costs that are related to a project
D)Principal payments that are directly related to the financing of a project
Q2) Which of the following would be considered a termination cash flow?
A)The expected salvage value of the asset
B)Any tax payments or refunds associated with the salvage value of the asset
C)Recapture of any investment in working capital that was included as an incremental cash outlay
D)All of the above
Q3) Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced,sales are forecasted at $2,000,000,Cost of Goods Sold at $1,200,000,other cash expenses at $300,000,depreciation expense at $800,000.The company has many other profitable product lines.It's marginal tax rate is 35%.Compute operating cash flow for the first year.
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) Approximately what percentage of new businesses survive their first year?
A)20%
B)40%
C)60%
D)80%
Q2) Klaus Nicholas plans to sell Christmas trees from a vacant lot in downtown Springfield.The trees will cost him $12 each.It will cost Klaus $1,500 to rent the lot from November 1 through December 30.If Klaus sells the trees for $20 each,how many trees must he sell to break even? Assume that he makes an initial,non-refundable purchase of 200 trees but can buy more trees in any quantity after that for $12 each.
A)$1,500/($20-$12)= 188 trees with a very small profit on the last tree
B)$3,900/$20 = 195 trees
C)All 200 trees
D)The Christmas tree project can never break even.
Q3) Accounting break-even means that the company is able to pay its interest expense and also the dividends shareholders were expecting.
A)True
B)False
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Jen and Barry's Ice Cream needs $20 million in new capital to expand its production facilities.It will use 40% debt and 60% equity.The company's after-tax cost of debt is 5% and the cost of equity is 12.5%.Flotation costs will be 3% for debt and 9% for equity.Compute Jen and Barry's weighted average flotation cost.
A)6.6%
B)6.0%
C)9.5%
D)16.1%
Q2) Lott Bros Developers evaluates a great many small to medium size projects each year.Some are riskier than others.Lott Bros should probably:
A)allow individual project managers to estimate their own discount rates.
B)try to identify the specific funding sources for each project.
C)use the company's overall WACC for all projects.
D)spend a great deal of time and money to estimate discount rates for each project.
Q3) The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?
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Page 16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Fibonacci Property Management's balance sheet shows total liabilities of $5 million and total assets of $13 million.Interest bearing liabilities total $3 million (book value).The market value of Fibonnacci's equity is $21 million.Fibonacci's debt ratio is ________.
A).38
B).23
C).125
D).24
Q2) Merrimac Brewing company's total assets equal $18 million.The book value of Merrimac's equity is $6 million.The market value of Merrimac's equity is $10 million.It's Debt to Value ratio is .5.What is the book value of Merrimac's interest- bearing debt?
A)$5 million
B)$10 million
C)$15 million
D)$20 million
Q3) Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.
Q4) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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17
Chapter 16: Dividend Policy
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Sample Questions
Q1) Due to the strengthening of the stock market over the past 50 years,stock splits and stock dividends are more common than cash dividends.
A)True
B)False
Q2) What is the fundamental purpose of a stock split?
A)A split shows the company's preference for retaining funds.
B)A split immediately brings the stock price to a lower trading range.
C)A split immediately increases the investor's wealth.
D)A split increases the threat of a hostile takeover.
Q3) If instead of a stock dividend,your firm decided to split the stock 2-1,then the number of shares outstanding and their par value per share would be:
A)1 million;$4.
B)1 million;$8.
C)2 million;$2.
D)2 million;$4.
Q4) Stock dividends and stock splits have the same overall effect.
A)True
B)False
Q5) Compare the Stable Dividend Payout to the Residual Dividend Policy.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Assume that Helaron,Inc.has sales of $83 million and fixed assets of $22.4 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Helaron is expected to generate sales of $94 million next year,what will the firm's investment in fixed assets be?
A)$19.8 million
B)$28.8 million
C)$16.2 million
D)$25.4 million
E)None of the above
Q2) Based on the information in Table 3,what are Thompson's projected total receipts (collections)for March?
A)$400,000
B)$310,000
C)($20,000)
D)$320,000
Q3) Banner's projected accrued expenses for 2005 are:
A)$120,000.
B)$160,000.
C)$100,000.
D)$200,000.
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Which of the following is most likely to occur if a firm over-invests in net working capital?
A)The current ratio will be lower than it should be.
B)The quick ratio will be lower than it should be.
C)The return on investment will be lower than it should be.
D)The times interest earned ratio will be lower than it should be.
Q2) A firm can reduce net working capital by substituting long-term financing,such as bonds,with short-term financing,such as a one-year notes payable.
A)True
B)False
Q3) One of the attractive features of commercial paper is an active secondary market.
A)True
B)False
Q4) Total assets must equal the sum of which sources of financing?
A)Spontaneous
B)Temporary
C)Permanent
D)Spontaneous,temporary and permanent
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Chapter 19: International Business Finance
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Sample Questions
Q1) Based on the forward rates in table 19.1,the British pound is expected to:
A)stay the same against the dollar.
B)weaken against the dollar.
C)fluctuate randomly against the dollar.
D)strengthen against the dollar.
Q2) The exchange rate that represents the number of units of a home currency that is required to purchase one unit of a foreign currency is referred to as a(n)________ quote.
A)forward
B)direct
C)market
D)indirect
E)arbitrage
Q3) Some complexities of conducting international business include:
A)multiple currencies.
B)differing legal requirements.
C)restrictions on repatriating earnings.
D)all of the above.
Q4) What is meant by interest rate parity?
Q5) What is the difference between and "ask" quote and a "bid" quote.
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) What are the differences between forward contracts and futures contracts? What are some advantages and disadvantages of each.
Q2) There is no actual buying or selling that occurs with a futures contract.
A)True
B)False
Q3) Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.00 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon.If the November spot price is $2.25 per gallon,Swenson's gross profit on the heating oil sold in June will be
A)$100,000.
B)($100,000).
C)$200,000.
D)$0.00.
Q4) A swap is generally structured so that no money initially changes hands.
A)True
B)False
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Page 22