Course Introduction
Financial Decision Making
Exam Materials
Financial Decision Making introduces students to the essential concepts and analytical tools used in financial management. The course focuses on the evaluation of financial data to inform strategic business decisions, including investment analysis, capital budgeting, risk assessment, and financing options. Students learn to interpret financial statements, apply quantitative methods to assess financial performance, and understand the impact of economic and market factors on organizational success. Through case studies and real-world scenarios, learners develop the critical thinking skills necessary to make informed decisions that enhance value in a dynamic business environment.
Recommended Textbook
Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A) overseeing accounting and tax functions
B) capital budgeting
C) managing credit
D) making investment decisions
E) managing risk
Answer: A
Q2) What is the most important duty of a financial manager?
A) to ensure that the firm has enough cash on hand to meet its commitments at any given time
B) to decide how to pay for investments
C) to manage working capital
D) to make investment decisions
E) to minimize taxes
Answer: D
Q3) Stock markets provide liquidity for a firm's shares.
A)True
B)False
Answer: True
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) In Canada,publicly traded companies can choose whether or not they wish to release periodic financial statements.
A)True
B)False
Answer: False
Q2) Which of the following firms would be expected to have a high ROE based on that firm's high profitability?
A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
B) a low-end retailer that has a low mark-up on all items it sells
C) a brokerage firm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
E) a mining firm that is mostly engaged in exploration for new deposits
Answer: A
Q3) Price-earnings ratios tend to be high for fast-growing firms.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) What are the the three rules of valuing cash flows at different points in time?
Answer: 1.It is only possible to compare or combine values at the same point in time.
2.To calculate a cash flow's future value,you must compound it.
3.To calculate the value of a future cash flow at an earlier point in time,we must discount it.
Q2) Whenever a good trades in a competitive market,the price the good trades for determines the value of the good.
A)True
B)False
Answer: True
Q3) You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer.You learn that the Dial-o-matic sells for $29.95.But wait,there's more! Ronco is also including in this deal a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95.Assuming that there is a competitive market for Ronco items,at what price must Ronco be selling this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
Answer: 29.95 + 10.95 + 7.95 = $48.85
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) An investor receives X dollars at the end of each of the next 3 years.If the present value of her investment is $10 million,what is her yearly cash flow,given that the interest rate is 5%?
A) $3.672 million
B) $3.33 million
C) $2.5 million
D) $2.879 million
E) $3.472 million
Q2) An annuity will pay you $5,000 per year for 25 years.What is the FV of this annuity at the end of 25 years,if your interest rate is 8%?
A) $126,207
B) $365,530
C) $125,000
D) $135,000
E) $53,374
Q3) The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True
B)False
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Page 6
Chapter 5: Interest Rates
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Sample Questions
Q1) You are considering purchasing a new truck that will cost you $34,000.The dealer offers you 1.9% APR financing for 48 months (with payments made at the end of the month).Assuming you finance the entire $34,000 and finance through the dealer,your monthly payments will be closest to:
A) $708
B) $594
C) $736
D) $1086
E) $697
Q2) Your bank account pays monthly interest with an APR of 8%.You are planning to buy a house in 6 years,and you wish to save $40,000 for the down payment.If you currently have no money in your account,how much will you need to save at the end of each month?
A) $451.18
B) $500.34
C) $555.56
D) $434.66
E) $438.53
Q3) Everything else remaining the same,under what situation will APR and EAR be equal?
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Page 7
Chapter 6: Bonds
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Sample Questions
Q1) What is the coupon rate of a 10-year $10,000 bond with semi-annual payments of $300?
A) 1%
B) 10%
C) 1.5%
D) 3%
E) 6%
Q2) The above table shows the yields to maturity on a number of one-year,zero-coupon securities.What is the price per $100 of the face value of a one-year,zero-coupon corporate bond with a BBB rating?
A) $92.21
B) $93.54
C) $94.16
D) $94.87
E) $94.52
Q3) What care,if any,should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q4) Why do bond prices fall as interest rates rise?
Q5) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) Which of the following tendencies of individual investors is called the disposition effect?
A) the tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals
B) the tendency to buy stocks that have been in the news, advertised more, have very high trading volume, or recently had extreme (high or low) returns
C) the tendency to put too much weight on their own experience rather than considering historical evidence
D) the tendency to hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase
E) the tendency for stock returns to be higher on sunny days
Q2) Individual investors trade conservatively,given the difficulty of finding over- and under-valued stocks.
A)True
B)False
Q3) How can the dividend-discount model handle changing growth rates?
Q4) Can the dividend-discount model handle negative growth rates?
Q5) What is a major assumption about growth rate in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) Assume that projects A and B are mutually exclusive.The correct investment decision and the best rationale for that decision is to
A) invest in project A, since NPVB < NPVA.
B) invest in project B, since IRRB > IRRA.
C) invest in project B, since NPVB > NPVA.
D) invest in project A, since NPVA > 0.
E) invest in project A, since IRRA > IRRB.
Q2) The net present value (NPV)of project A is closest to:
A) 12.0
B) 12.6
C) 15.0
D) 42.9
E) 14.2
Q3) The payback period for project B is closest to:
A) 2.5 years
B) 2.0 years
C) 2.2 years
D) 2.4 years
E) 3.0 years
Q4) What is the general shape of the net present value (NPV)profile?
Page 10
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) What is the ultimate goal of the capital budgeting process?
A) to determine how the consequences of making a particular decision affects the firms revenues and costs
B) to list the projects and investments that a company plans to undertake in the future
C) to forecast the consequences of a list of future projects to the firm
D) to determine the effect of the decision to accept or reject a project on the firms cash flows
E) to calculate the incremental earnings of a project
Q2) The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to:
A) $13.5 million
B) $31.5 million
C) $56.0 million
D) $24.0 million
E) $10.5 million
Q3) What is the ultimate goal of capital budgeting?
Q4) Why does capital budgeting focus on incremental revenues and costs,instead of the projected total revenues and costs of the firm?
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Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?
A) 1.5%,, 22.0%
B) -8.8%, 32.2%
C) -29.3%, 52.7%
D) -29.3%, 73.2%
E) -14.4%, 26.2%
Q2) The S&P TSX Composite index delivered annual returns of 17.61%,-8.71%,7.19% and 12.99% from 2010 to 2013.If you invested $10,000 in the index at the beginning of 2010,what amount would your investment have been worth at the end of 2013?
A) $13,256
B) $13,005
C) $12,908
D) $12.974
E) $14.388
Q3) Is volatility a reasonable measure of risk when evaluating the investment in a single stock?
Q4) How does diversification affect systematic and unsystematic risk?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) The security market line is a graph of the expected return of a stock as a function of systematic risk (beta).
A)True
B)False
Q2) Barrick Gold Corp stock has a beta of 2.1.If the risk-free rate is 2.6%,and expected market return is 9%,what is the expected return of Barrick Gold Corp stock,according to the CAPM?
A) 10.8%
B) 10.4%
C) 21.5%
D) 13.4%
E) 16%
Q3) Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.
A) between 10% and 12%
B) between 14% and 16%
C) between 5% and 7%
D) between 11% and 13%
E) between 4% and 6%
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Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) SAP Inc.received a $2 million grant under its Small Business Innovation program.SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards.The firm estimates that each shipyard spends $600,000 a year on storm water clean-up efforts.If SAP is able to sign up and retain four shipyards from the first year onwards,what is the present value (PV)of the project (net of investment)if the cost of capital for SAP is 15% per year? Assume a cost of operations and other costs for SAP equal 40% of revenue.
A) $6.3 million
B) $6.7 million
C) $7.6 million
D) $7.9 million
E) $8.3 million
Q2) The WACC does not depend on the risk of a company's line of business.
A)True B)False
Q3) Internal financing is more costly than external financing because of issuance costs. A)True B)False
Q4) What is the assumption about leverage when using WACC to evaluate a project?
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Chapter 13: Risk and the Pricing of Options
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Sample Questions
Q1) The price of a European put option on Scotiabank stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.60.If the exercise price of the options is $45,and the risk-free rate is 5%,what must be the current price of Scotiabank stock?
A) $42.75
B) $45.00
C) $43.51
D) $42.21
E) $43.40
Q2) The price of a European put option on Potash Corp stock with an exercise price of $48 and one year to expiry is trading at $4.15.The current price of the stock is $45,and the risk-free rate is 3%.With no arbitrage,what must be the price of a European call on Potash Corp with an exercise price of $48?
A) $2.55
B) $5.75
C) $3.00
D) $2.91
E) $0.16
Q3) What are European options?
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Page 15
Chapter 14: Raising Equity Capital
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Sample Questions
Q1) Niagara Novelty Stores stock trades at $46 per share and there are 34 million shares outstanding.The management would like to raise $150 million in an SEO and current investors would like to sell $30 million of their own stock.If the underwriter charges 6% of gross proceeds,how many shares must it sell in the total (primary and secondary)offering?
A) 3.69 million
B) 3.26 million
C) 3.47 million
D) 4.16 million
E) 3.91 million
Q2) An IPO is offered at $12.50 per share for 4 million shares.The IPO underwriters had a spread of 6.5%.What was the total fee paid to the underwriters?
A) $3.25 million
B) $4 million
C) $260,000
D) $2.25 million
E) $12.5 million
Q3) Who benefits from IPO underpricing?
Q4) What are some of the disadvantages of going public?
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Chapter 15: Debt Financing
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Sample Questions
Q1) Which of the following statements about bonds that are both convertible and callable is most correct?
A) If these bonds are called by the issuer, the holder has no option other than to let them be called.
B) Prior to maturity, the value of such a bond will be greater than the shares of stock that bond can be converted into.
C) The decision to be made by the bondholder when the bonds are called is the same as she would have to make at maturity.
D) The issuer cannot force bondholders to decide whether or not to convert at a time of the issuer's choosing.
E) Prior to the maturity date, a convertible bond is worth less than an otherwise identical straight bond.
Q2) What are callable bonds?
Q3) If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.
A)True
B)False
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Chapter 16: Capital Structure
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Sample Questions
Q1) Issuing debt provides incentives for managers to run the firm efficiently because A) debt increases the funds available to managers to run the firm.
B) ownership may remain more concentrated, improving monitoring of management.
C) managers may take actions that benefit shareholders but harm creditors and lower the value of the firm.
D) shareholders prefer to decline new projects to save cash, even if their NPVs are positive.
E) managers will be obligated to run the firm in the interests of bondholders.
Q2) What is the capital structure of a firm?
Q3) The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its
A) capital structure.
B) leverage.
C) retained earnings.
D) paid-out capital.
E) debt-to-value ratio.
Q4) Equity in a firm with no debt is called unlevered equity.
A)True
B)False
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Chapter 17: Payout Policy
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Sample Questions
Q1) Including its cash,Omicron's total market value is closest to:
A) $500 million
B) $900 million
C) $400 million
D) $450 million
E) $300 million
Q2) Collingwood Costumes is an all-equity firm with 80 million shares outstanding.Collingwood has $75 million in cash,and expects future free cash flows of $15 million per year.The cash can be used to expand the firm's future operations,increasing future free cash flows to $16 million per year.If Collingwood's cost of capital for the expansion is 10%,what will be the difference in the firm's share price compared to using the cash for a share repurchase?
A) Share price is $0.12 higher with expansion.
B) Share price is $0.12 higher with repurchase.
C) Share price is the same with both options.
D) Share price is $0.81 higher with expansion.
E) Share price is $0.81 higher with repurchase.
Q3) What is the difference between an open market share repurchase and a targeted repurchase?
Q4) What are the different ways a firm can repurchase shares?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Sample Questions
Q1) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation unlevered price-earnings ratio of Ideko in 2015 is closest to:
A) 17.2
B) 16.4
C) 14.5
D) 19.4
E) 15.8
Q2) What is the plug?
Q3) Compute the value of a firm with free cash flows of $9000,$7000,and $5000 over the next three years,a terminal firm value of $30,000 after three years,and the unlevered cost of capital is 10%.Assume that the interest rate tax shield is zero.
A) $36,109
B) $37,098
C) $38,745
D) $40,263
E) $42,772
Q4) What is the major shortcoming of the percent of sales method for firms experiencing rapid growth?
Q5) Why is EBITDA multiple used for valuation rather than sales or earnings?
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Chapter 19: Working Capital Management
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Sample Questions
Q1) Gencom International has inventory days of 22,and accounts payable days of 37.If its cash conversion cycle is 28 days,what is Gencom's accounts receivable days?
A) 43 days
B) 31 days
C) 13 days
D) 87 days
E) 29 days
Q2) Jerome Industries has inventory days of 31,accounts payable days of 28,and a cash conversion cycle of 56 days.What is its accounts receivable days?
A) 28 days
B) 25 days
C) 56 days
D) 53 days
E) 59 days
Q3) What is the credit period?
Q4) Trade credit should always be used when it is offered.
A)True
B)False
Q5) What is the collection float?
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Chapter 20: Short Term Financial Planning
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Sample Questions
Q1) Pipeline Pharmaceuticals has a one-year $2 million line of credit at an interest rate of 5% (EAR).The loan has a loan origination fee of 2%.What is the actual interest rate paid?
A) 7%
B) 7.14%
C) 5%
D) 7.1%
E) 5.9%
Q2) What are Blunderstone's temporary working capital requirements in the fourth quarter?
A) $2,700,000
B) $3,400,000
C) $5,450,000
D) $4,450,000
E) $1,750,000
Q3) The prime rate is the rate banks charge all but their largest customers,who can negotiate a sub-prime rate.
A)True
B)False
Q4) How can a conservative financing policy reduce firm value?
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Chapter 21: Risk Management
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Q1) To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property,a firm would purchase
A) business interruption insurance.
B) property insurance.
C) business liability insurance.
D) key personnel insurance.
E) damage insurance.
Q2) When a firm can pass on its cost increases to its customers and revenue decreases to its suppliers,it has a ________ hedge.
A) natural
B) basis
C) vertical
D) horizontal
E) hidden
Q3) Firms can hedge risk by making real investments in assets with offsetting risk.
A)True
B)False
Q4) What is adverse selection?
Q5) How does insurance allow firms to reduce issuance costs?
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Chapter 22: International Corporate Finance
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Q1) IBM enters into a forward contract to purchase 200,000 euros at a rate of 1.90 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?
A) $300,000
B) $325,000
C) $380,000
D) $400,000
E) $240,000
Q2) Suppose the WACC for a Canadian company is 6.1%,and the Canadian risk-free interest rate is 3%.If the U.S.risk-free interest rate is 1.4%,what is the company's U.S.WACC?
A) 7.5%
B) 7.8%
C) 4.7%
D) 4.5%
E) 7.6%
Q3) Why do firms prefer forward contracts rather than the cash-can-carry strategy?
Q4) What are the three factors that drive the supply and demand for each currency?
Q5) How can deferring repatriation of earnings benefit a firm?
Q6) Why might firms prefer hedging with options rather than forward contracts?
Page 24
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Chapter 23: Leasing
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Q1) Suppose the lease is a five-year fair market value lease,and the trucks have a remaining useful life of 8 years.If the monthly lease payments are $22,000 and the appropriate discount rate is 6% APR with monthly compounding,will the lease be classified as an operating lease or a finance lease for the lessee?
A) Finance lease, because the title to the property transfers to the lessee at the end of the lease term.
B) Finance lease, because the present value of the minimum lease payments at the start of the lease is substantially all of the asset's fair value.
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than substantially all of the asset's fair value.
D) Operating lease, because the lease term is for the major part of the estimated economic life of the asset.
E) Finance lease, because the lease term is for the major part of the estimated economic life of the asset.
Q2) For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?
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Page 25
Chapter 24: Mergers and Acquisitions
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Q1) Purchasing a corporation requires a more accurate estimate of value than can be achieved using the method of comparables.
A)True
B)False
Q2) Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?
A) $0
B) $2 million
C) $3 million
D) $5 million
E) $4 million
Q3) What is the major drawback of adopting a poison pill?
Q4) What is the difference between economies of scale and economies of scope?
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Chapter 25: Corporate Governance
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Q1) How does a pyramid structure work?
Q2) Directors who are not employees,former employees,or family members of employees and who do not have existing or potential business relationships with the firm are called
A) monitoring directors.
B) independent directors.
C) grey directors.
D) inside directors.
E) unelected directors.
Q3) Directors who are employees,former employees,or family members of employees are called
A) managing directors.
B) independent directors.
C) inside directors.
D) grey directors.
E) unelected directors.
Q4) What is corporate governance?
Q5) How does shareholder voice serve to discipline poorly performing managers?
Q6) What is tunnelling?
Q7) How do securities analysts provide outside monitoring of a corporation?
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