Financial Decision Making
Exam Practice Tests
Course Introduction
Financial Decision Making explores the analytical tools and frameworks essential for individuals and organizations to make informed financial choices. The course covers key concepts such as time value of money, risk and return, capital budgeting, financial planning, and forecasting. Students will learn how to interpret financial statements, evaluate investment opportunities, and understand the impact of financial decisions on business value and performance. Emphasis is placed on practical applications, critical thinking, and the use of quantitative methods to assess real-world financial scenarios, preparing students to effectively solve problems and make sound decisions in dynamic financial environments.
Recommended Textbook
Fundamentals of Corporate Finance 12th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 is a governmental response to:
A) decreasing corporate profits.
B) the terrorist attacks on 9/11/2001.
C) a weakening economy.
D) deregulation of the stock exchanges.
E) management greed and abuses.
Answer: E
Q2) The articles of incorporation:
A) describe the purpose of the firm and set forth the number of shares of stock that can be issued.
B) are amended periodically especially prior to corporate elections.
C) explain how corporate directors are to be elected and the length of their terms.
D) sets forth the procedures by which a firm regulates itself.
E) include only the corporation's name and intended life.
Answer: A
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?
A) Interest expense
B) Taxes
C) Cost of goods sold
D) Labor costs
E) Administrative expenses
Answer: A
Q2) Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?
A) $33,763
B) $40,706
C) $58,218
D) $65,161
E) $67,408
Answer: A
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Chapter 3: Working with Financial Statements
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Sample Questions
Q1) Which one of the following ratios is a measure of a firm's liquidity?
A) Cash coverage ratio
B) Profit margin
C) Debt-equity ratio
D) Quick ratio
E) NWC turnover
Answer: D
Q2) Which one of the following accurately describes the three parts of the DuPont identity?
A) Equity multiplier, profit margin, and total asset turnover
B) Debt-equity ratio, capital intensity ratio, and profit margin
C) Operating efficiency, equity multiplier, and profitability ratio
D) Return on assets, profit margin, and equity multiplier
E) Financial leverage, operating efficiency, and profitability ratio
Answer: A
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Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) Which capital intensity ratio indicates the smallest need for fixed assets per dollar of sales?
A) 0.07
B) 0.86
C) 0.39
D) 1.00
E) 1.15
Q2) The Two Sisters has a return on assets of 9 percent and a dividend payout ratio of 75 percent. What is the internal growth rate?
A) 3.24 percent
B) 4.05 percent
C) 3.97 percent
D) 2.30 percent
E) 2.25 percent
Q3) When planning for the long run, the planning horizon is usually a period of:
A) 5 to 10 years.
B) 2 to 5 years.
C) 1 to 3 years.
D) 3 to 7 years.
E) 5 years or more.
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Your older sister deposited $2,500 today at 6.5 percent interest for 15 years. However, you can only earn 6.25 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount saved at the end of the 15 years?
A) $92.19
B) $89.70
C) $88.78
D) $90.21
E) $93.39
Q2) Theo wants to have $40,000 for a down payment on a house five years from now. He can either deposit one lump sum today or he can wait one year and deposit a lump sum. Assume an annual interest rate of 3.5 percent. How much additional money must he deposit if he waits for one year rather than making the deposit today?
A) $1,001.98
B) $986.13
C) $1,178.76
D) $948.03
E) $1,020.18
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Chapter 6: Discounted Cash Flow Valuation
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Q1) What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?
A) $9,417.69
B) $9,238.87
C) $9,333.33
D) $9,420.12
E) $9,881.72
Q2) John's Auto Repair just obtained an interest-only loan of $35,000 with annual payments for 10 years and an interest rate of 8 percent. What is the amount of the loan payment in Year 8?
A) $5,216.03
B) $4,918.07
C) $4,280.00
D) $5,211.06
E) $2,800.00
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8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) The current yield is defined as the annual interest on a bond divided by the:
A) coupon rate.
B) face value.
C) market price.
D) call price.
E) par value.
Q2) Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?
A) Current yield
B) Written record of all the current bond holders
C) List of collateral used as bond security
D) Current market price
E) Price at which a bondholder can resell a bond to another bondholder
Q3) Which one of the following statements is correct?
A) The risk-free rate represents the change in purchasing power.
B) Any return greater than the inflation rate represents the risk premium.
C) Historical real rates of return must be positive.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) The real rate must be less than the nominal rate given a positive rate of inflation.
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Page 9
Chapter 8: Stock Valuation
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Sample Questions
Q1) Supernormal growth is a growth rate that:
A) is both positive and follows a year or more of negative growth.
B) exceeds a firm's previous year's rate of growth.
C) is generally constant for an infinite period of time.
D) is unsustainable over the long term.
E) applies to a single, abnormal year.
Q2) The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?
A) 4.84 percent
B) 6.41 percent
C) 9.92 percent
D) 6.14 percent
E) 7.28 percent
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Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) A project's average net income divided by its average book value is referred to as the project's average:
A) net present value.
B) internal rate of return.
C) accounting return.
D) profitability index.
E) payback period.
Q2) A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A) Conventional cash flows
B) Cash flows that extend beyond the acceptable payback period
C) One year or more in the middle of a project where the cash flows are equal to zero
D) A cash inflow at Time 0
E) Cash inflows that are equal in amount
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11
Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?
A) Moving furniture to provide floor space for the appliances
B) Paying the rent for the store
C) Selling furniture to appliance customers
D) Having the current store manager oversee appliance sales
E) Using the store's billing system for appliance sales
Q2) Keyser Mining is considering a project that will require the purchase of $479,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the five-year life of the project after which it will be worthless. The required return is 12 percent and the tax rate is 30 percent. What is the value of the depreciation tax shield in Year 4 of the project assuming no bonus depreciation is taken?
A) $28,740
B) $32,200
C) $78,600
D) $138,400
E) $143,700
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Page 12
Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) Forecasting risk is defined as the possibility that:
A) some proposed projects will be rejected.
B) some proposed projects will be temporarily delayed.
C) incorrect decisions will be made due to erroneous cash flow projections.
D) some projects will be mutually exclusive.
E) tax rates could change over the life of a project.
Q2) Given the following, which feature identifies the most desirable level of output for a project?
A) Operating cash flow equal to the depreciation expense
B) Payback period equal to the project's life
C) Discounted payback period equal to the project's life
D) Zero IRR
E) Zero operating cash flow
Q3) PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:
A) financial deferral.
B) financial allocation.
C) capital allocation.
D) marginal rationing.
E) hard rationing.
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Chapter 12: Some Lessons from Capital Market History
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Sample Questions
Q1) Suppose you bought a $1,000 face value bond with a coupon rate of 5.6 percent one year ago. The purchase price was $987.50. You sold the bond today for $994.20. If the inflation rate last year was 2.6 percent, what was your exact real rate of return on this investment?
A) 4.88 percent
B) 5.32 percent
C) 3.65 percent
D) 3.78 percent
E) 4.47 percent
Q2) Today, you sold 540 shares of stock and realized a total return of 7.3 percent. You purchased the shares one year ago at a price of $24 a share and have received a total of $86 in dividends. What is your capital gains yield on this investment?
A) 5.68 percent
B) 6.64 percent
C) 6.39 percent
D) 7.26 percent
E) 7.41 percent
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14
Chapter 13: Return, Risk, and the Security Market Line
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Sample Questions
Q1) The systematic risk of the market is measured by a:
A) beta of 1.
B) beta of 0.
C) standard deviation of 1.
D) standard deviation of 0.
E) variance of 1.
Q2) You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? \[\begin{array} { l c c }
\text { State of } & \text { Probability of } & \text { Rate of Return } \\
\text { Economy } & \text { State of Economy } & \text { if State Occurs } \\
\text { Boorn } & .25 & .185 \\
\text { Nomal } & .60 & .143 \\
\text { Bust } & .15 &. 032
\end{array}\]
A) 14.49 percent
B) 14.64 percent
C) 13.87 percent
D) 13.69 percent
E) 14.23 percent
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Page 15
Chapter 14: Cost of Capital
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Sample Questions
Q1) Holdup Bank has an issue of preferred stock with a stated dividend of $7 that just sold for $87 per share. What is the bank's cost of preferred?
A) 7.00 percent
B) 7.64 percent
C) 8.39 percent
D) 8.05 percent
E) 7.54 percent
Q2) Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company's cost of equity:
A) is affected by the firm's rate of growth projections.
B) implies that the firm pays out all of its earnings to its shareholders.
C) is dependent upon a reliable estimate of the market risk premium.
D) would be unaffected if the dividend discount model were applied instead.
E) will be unaffected by changes in overall market risks.
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16
Chapter 15: Raising Capital
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Sample Questions
Q1) Kurt currently owns 4.2 percent of NT Co. The company has a total of 685,000 shares outstanding with a current market price of $19.20 a share. At present, the firm is offering an additional 15,000 shares at a price of $18 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?
A) 4.06 percent
B) 4.11 percent
C) 4.19 percent
D) 4.14 percent
E) 4.26 percent
Q2) Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n):
A) aftermarket specialist.
B) venture capitalist.
C) underwriter.
D) seasoned writer.
E) primary investor.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Miller's Dry Goods is an all-equity firm with 40,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $160,000. Miller's has decided to add leverage to its financial operations by issuing $200,000 of debt at 7 percent interest and using the proceeds to repurchase shares of stock. Jen owns 500 shares of Miller's stock and can loan out funds at 7 percent interest. How many shares of Miller's stock must Jen sell to offset the leverage that Miller's is assuming? (Assume Jen loans out all of the funds she receives from the sale of stock. Ignore taxes.)
A) 125 shares
B) 100 shares
C) 50 shares
D) 25 shares
E) 75 shares
Q2) The interest tax shield is a key reason why:
A) the required rate of return on assets rises when debt is added to the capital structure.
B) the value of an unlevered company is equal to the value of a levered company.
C) the net cost of debt is generally less than the cost of equity.
D) the cost of debt is equal to the cost of equity for a levered company.
E) companies prefer equity financing over debt financing.
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Page 18
Chapter 17: Dividends and Payout Policy
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Q1) Purvis Lawn Products has 5,400 shares of stock outstanding at a market price of $6.37 a share. What will the market price per share be if the company does a reverse stock split of one-for-three?
A) $2.12
B) $6.37
C) $9.37
D) $21.10
E) $19.11
Q2) The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?
A) Decision date
B) Date-of-record
C) Declaration date
D) Payment date
E) Ex-dividend date
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Chapter 18: Short Term Finance and Planning
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Sample Questions
Q1) Juno Industrial Supply has a line of credit of $200,000 with an interest rate of 7.1 percent. The loan agreement requires a compensating balance of 3.3 percent of the total amount borrowed, which will be held in an interest-free account. What is the effective interest rate if the company requires $132,000 for operations for one year?
A) 7.27 percent
B) 7.21 percent
C) 7.38 percent
D) 7.53 percent
E) 7.34 percent
Q2) The optimal investment in current assets for an active company occurs at the point where:
A) both shortage costs and carrying costs equal zero.
B) shortage costs are equal to zero.
C) carrying costs are equal to zero.
D) carrying costs exceed shortage costs.
E) shortage costs and carrying costs are equal.
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20
Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) On an average day, WW Co. receives $329,418 in checks from customers. These checks clear the bank in an average of 1.46 days. The applicable daily interest rate is .019 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days.
A) $110.72
B) $91.38
C) $97.20
D) $62.59
E) $99.17
Q2) GT Motors regularly issues short-term debt to finance its daily operations. However, the credit markets suddenly tightened and GT is unable to sell debt at this time. Fortunately, they have some cash reserves that they can use to fund operations until additional credit becomes available. The need to retain cash for situations such as this represents which one of the following motives for holding cash?
A) Speculative
B) Float
C) Compensating
D) Precautionary
E) Transaction
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Chapter 20: Credit and Inventory Management
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Sample Questions
Q1) Under its current cash sales only policy, JJ's sells 186 units a month at a price of $330 each. The variable cost per unit is $155 and the monthly interest rate is 1.3 percent. The firm believes it can sell an additional 25 units per month if it offers a net 30 credit policy. What is the present value of the switch using the one-shot approach?
A) $312,806
B) $291,543
C) $271,283
D) $288,946
E) $311,118
Q2) Which one of the following will increase a firm's investment in accounts receivables?
A) An increase in the number of days for which credit is granted
B) A decrease in credit sales
C) An increase in cash sales
D) A decrease in the average collection period
E) A decrease in average daily credit sales
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22
Chapter 21: International Corporate Finance
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Sample Questions
Q1) Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate three years from now?
A) 252.792 HUF
B) 272.855 HUF
C) 283.322 HUF
D) 262.679 HUF
E) 259.406 HUF
Q2) International bonds issued in multiple countries but denominated in a single currency are called:
A) Treasury bonds.
B) Bulldog bonds.
C) Eurobonds.
D) Yankee bonds.
E) Samurai bonds.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) The tendency to sell winners and hold losers is known as the:
A) representativeness heuristic.
B) disposition effect.
C) house money effect.
D) self-attribution bias.
E) affect heuristic.
Q2) Anytime Ted analyzes a proposed project, he always assigns a much higher probability of success to the project than is warranted by the information he has gathered. Ted suffers from which one of the following?
A) Frame dependence
B) Mental accounting
C) Endowment effect
D) Confirmation bias
E) Overoptimism
Q3) All of the following create limits to arbitrage except:
A) firm-specific risk.
B) noise traders.
C) thinly traded securities.
D) rational traders.
E) implementation costs.
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Chapter 23: Enterprise Risk Management
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Q1) Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $43 and ________ if the price per barrel is $47.
A) $2; $2
B) $2; $0
C) $0; $2
D) $2; $2
E) $2; $2
Q2) A U.S. bank has an agreement with a German bank to exchange $500,000 for 397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:
A) floating exchange.
B) spot trade.
C) currency option.
D) futures contract.
E) swap contract.
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Chapter 24: Options and Corporate Finance
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Q1) Dressler Tech is considering a 3-year project with a discount rate of 15 percent, an initial cost of $95,000, projected sales of 1,300 units on the last day of each year, and a cash flow per unit of $38. The project can be abandoned following the sales on the last day of Year 2 at which time the project's assets could be sold for an estimated $40,000. What is the net present value of this project at Time 0 if the sales forecast for Year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,100 or 1,500 units a year?
A) $13,474
B) $2,526
C) $19,172
D) $8,192
E) $18,887
Q2) The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:
A) conversion premium.
B) par value.
C) conversion value.
D) conversion price.
E) conversion ratio.
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Page 26
Chapter 25: Option Valuation
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Q1) Day's End stock is selling for $43 a share. The 6-month call with a strike price of $45 is priced at $.30. Risk-free assets are currently returning 4.1 percent per year, compounded continuously. What is the price of a 6-month put with a strike price of $45?
A) $1.39
B) $1.46
C) $1.28
D) $1.51
E) $1.32
Q2) A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45?
A) $.57
B) $.63
C) $.91
D) $1.36
E) $1.54
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Chapter 26: Mergers and Acquisitions
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Q1) Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two firms have decided to work together to find a more efficient way to recycle rejected products. Thus, the two companies are each going to assign two engineers to this project and have agreed to share any and all costs. This project is an example of a: A) consolidation.
B) merged alliance.
C) joint venture.
D) takeover project.
E) strategic alliance.
Q2) Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a:
A) consolidation.
B) strategic alliance.
C) joint venture.
D) merged alliance.
E) takeover project.
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28
Chapter 27: Leasing
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Q1) A firm can either lease or buy some equipment costing $72,900. The lease payments would be $18,500 a year for four years. The equipment has a 4-year life after which it is expected to have a resale value of $3,600. The firm uses straight-line depreciation over the life of the asset, borrows money at 11 percent, and has a tax rate of 21 percent. The company does not expect to owe any taxes for at least four years because of its operating losses. What is the incremental cash flow for Year 3 if the company decides to lease rather than purchase the equipment?
A) $29,165
B) $21,821
C) $18,500
D) $18,559
E) $17,635
Q2) A financial lease:
A) is generally called a capital lease by accountants.
B) requires the lessor to maintain the asset.
C) is a partially amortized lease.
D) is often called a single net lease.
E) can generally be cancelled without penalty.
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