Financial Decision Making
Exam Questions
Course Introduction
Financial Decision Making explores the principles and analytical tools essential for making informed financial choices in both personal and organizational contexts. The course covers topics such as budgeting, investment analysis, risk assessment, capital structure, and cost of capital. Students learn to interpret financial statements, assess the value of assets, and understand the implications of various financing options. Emphasis is placed on practical application through case studies and real-world scenarios, equipping students with the skills to evaluate financial opportunities and challenges, and to make sound decisions that align with organizational or personal financial goals.
Recommended Textbook Essentials of Corporate Finance 9th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which one of the following situations is most apt to create an agency conflict?
A)Compensating a manager based on his or her division's net income
B)Giving all employees a bonus if a certain level of efficiency is maintained
C)Hiring an independent consultant to study the operating efficiency of the firm
D)Basing management bonuses on the length of employment
E)Laying off employees during a slack period
Answer: D
Q2) The issuer of a security must be involved in all _____ transactions involving that security.
A)exchange-listed
B)secondary market
C)over-the-counter
D)dealer market
E)primary market
Answer: E
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Chapter 2: Financial Statements,Taxes,and Cash Flow
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Q1) The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920.The depreciation expense for the year is $46,080 and the interest expense is $11,460.What is the amount of the net capital spending?
A)-$22,360
B)-$4,780
C)$23,720
D)$58,340
E)$69,800
Answer: E
Q2) The Carpentry Shop has sales of $398,600,costs of $254,800,depreciation expense of $26,400,interest expense of $1,600,and a tax rate of 34 percent.What is the net income for this firm?
A)$61,930
B)$66,211
C)$67,516
D)$76,428
E)$83,219
Answer: D
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Wiggle Pools has total equity of $358,200 and net income of $47,500.The debt-equity ratio is .68 and the total asset turnover is 1.2.What is the profit margin?
A)4.82 percent
B)5.23 percent
C)5.67 percent
D)6.58 percent
E)7.31 percent
Answer: D
Q2) Discount Outlet has net income of $389,100,a profit margin of 2.8 percent,and a return on assets of 8.6 percent.What is the capital intensity ratio?
A).33
B).67
C)1.49
D)1.34
E)3.07
Answer: A
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) At 10 percent interest,how long does it take to triple your money?
A)14.33 years
B)11.53 years
C)9.67 years
D)10.36 years
E)10.56 years
Q2) The relationship between the present value and the investment time period is best described as:
A)direct.
B)inverse.
C)unrelated.
D)ambiguous.
E)parallel.
Q3) You have $500 today and want to triple your money in 6 years.What interest rate must you earn if the interest is compounded annually?
A)18.08 percent
B)19.90 percent
C)22.15 percent
D)20.09 percent
E)21.21 percent
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Dixie's Markets offers credit to its customers and charges interest of 1.2 percent per month.What is the effective annual rate?
A)15.39 percent
B)14.61 percent
C)15.10 percent
D)15.51 percent
E)15.73 percent
Q2) What is the effective annual rate of 14.9 percent compounded quarterly?
A)14.48 percent
B)14.67 percent
C)15.23 percent
D)15.54 percent
E)15.75 percent
Q3) A 30-year home mortgage is a classic example of:
A)a set of unequal cash flows.
B)an ordinary annuity.
C)a perpetuity.
D)an annuity due.
E)a consol.
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A debenture is:
A)an unsecured bond.
B)a bearer form bond.
C)a bond with a call provision.
D)a bond with a sinking fund provision.
E)a bond secured by a blanket mortgage.
Q2) You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,a coupon rate of 3.8 percent,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?
A)$1,000.00
B)$1,146.67
C)$1,155.83
D)$1,176.67
E)$1,180.00
Q3) Generally speaking,bonds issued in the U.S.pay interest on a(n)_____ basis.
A)annual
B)semiannual
C)quarterly
D)monthly
E)daily
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?
A) $14.72
B) $9.52
C) $2.52
D) $1.59
E) $11.87
Q2) The common stock of GT Enterprises is selling for $63.09 a share. The company pays a constant annual dividend and has a total return of 11.64 percent. What is the amount of the dividend?
A) $5.02
B) $4.04
C) $7.34
D) $7.70
E) $6.81
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) You are making an investment of $110,000 and require a rate of return of14.6 percent.You expect to receive $48,000 in the first year,.$52,500 in the second year,and $55,000 in the third year.There will be a cash outflow of $900 in the fourth year to close out the.investment.What is the net present value of this investment?
A)$7,881.55
B)$4,305.56
C)$1,879.63
D)$633.33
E)$8,534.25
Q2) Which one of the following analytical methods is based on net income?
A)Profitability index
B)Internal rate of return
C)Average accounting return
D)Modified internal rate of return
E)Payback
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The pro forma income statements for a proposed investment should include all of the following except:
A)fixed costs.
B)forecasted sales.
C)depreciation expense.
D)taxes.
E)changes in net working capital.
Q2) An all-equity firm has net income of $46,420,depreciation of $3,758,and taxes of $23,915.What is the firm's operating cash flow?
A)$47,850
B)$51,950
C)$46,250
D)$50,178
E)$46,750
Q3) A pro forma financial statement is a financial statement that:
A)expresses all values as a percentage of either total assets or total sales.
B)compares actual results to the budgeted amounts.
C)compares the performance of a firm to its industry.
D)projects future years' operating results.
E)values all assets based on their current market values.
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Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?
A)05 percent
B)5 percent
C)1.0 percent
D)2.5 percent
E)5.0 percent
Q2) The Bermuda Triangle Store pays a constant dividend.Last year,the dividend yield was 4.0 percent when the stock was selling for $16 a share.What must the stock price be today if the market currently requires a 4.3 percent dividend yield on this stock?
A)$14.88
B)$12.30
C)$15.59
D)$19.22
E)$12.48
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Chapter 11: Risk and Return
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Sample Questions
Q1) Which one of these represents systematic risk?
A)Major layoff by a regional manufacturer of power boats
B)Increase in consumption created by a reduction in personal tax rates
C)Surprise firing of a firm's chief financial officer
D)Closure of a major retail chain of stores
E)Product recall by one manufacturer
Q2) The beta of a risky portfolio cannot be less than nor greater than _.
A)0; 1
B)1; the market beta
C)the lowest individual beta in the portfolio; market beta
D)the market beta; the highest individual beta in the portfolio
E)the lowest individual beta in the portfolio; the highest individual beta in the portfolio
Q3) A portfolio is:
A)a single risky security.
B)any security that is equally as risky as the overall market.
C)any new issue of stock.
D)a group of assets held by an investor.
E)an investment in a risk-free security.
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Chapter 12: Cost of Capital
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Sample Questions
Q1) Lester lent money to The Corner Store by purchasing bonds issued by the store.The rate of return that he and the other lenders require is referred to as the:
A)pure play cost.
B)cost of debt.
C)weighted average cost of capital.
D)subjective cost.
E)cost of equity.
Q2) Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration.Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines.Kate is applying the ___ approach.
A)pure play
B)divisional rating
C)subjective
D)straight WACC
E)equity rating
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The Piano Movers can borrow at 7.8 percent.The firm currently has no debt,and the cost of equity is 15 percent.The current value of the firm is $680,000.What will the value be if the firm borrows $140,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.
A)$820,000
B)$540,000
C)$750,000
D)$571,000
E)$729,000
Q2) A prepack:
A)guarantees full payment to all creditors but lengthens the time span of the debt.
B)is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.
C)protects the interests of both the current creditors and the existing shareholders. D)applies only if a firm files under Chapter 7 of the bankruptcy code.
E)extends the time that a firm is protected by the bankruptcy process.
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Chapter 14: Dividends and Dividend Policy
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Q1) Which one of the following is a payment of either cash or shares of stock that is paid out of earnings to a firm's shareholders?
A)Interest
B)Capital surplus
C)Retained earnings
D)Dividend
E)Stock repurchase
Q2) The ex-dividend date is defined as _____ day(s)before the date of record.
A)three business
B)three
C)two business
D)two
E)one
Q3) Which statement is correct?
A)Tax rates are the key determinant to a company's dividend policy.
B)Firms are equally likely to increase or decrease their normal dividends per share.
C)Dividends tend to be more erratic than earnings.
D)Mature firms are less apt to pay dividends than young firms.
E)Dividend growth tends to lag earnings growth
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) What is the advertisement,commonly found in financial newspapers,that announces a public offering of securities and provides the name of the underwriters called?
A)Prospectus
B)Red herring
C)Tombstone
D)Green Shoe
E)Underwriter's ad
Q2) A new issue of common stock offered to the general public by a firm that is currently publicly held is called a(n):
A)initial public offering.
B)private placement.
C)rights offer.
D)venture capital offer.
E)seasoned equity offering.
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Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) The Corner Store is a small-sized,general store that stocks a minimal level of basic supplies and offers gasoline to a rural community.Which type of credit is probably best-suited for financing this store's inventory?
A)Trust receipt financing
B)Receivables factoring
C)Field warehousing
D)Blanket inventory lien
E)Receivables assignment
Q2) The Corner Market has annual sales of $761,000 and cost of goods sold of $568,000.The profit margin is 4.2 percent and the accounts payable period is 37 days.What is the average accounts payable balance?
A)$77,142
B)$65,488
C)$57,578
D)$73,211
E)$59,449
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18
Chapter 17: Working Capital Management
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Sample Questions
Q1) The Dog House offers credit terms of 2/7,net 20 to all of its customers.Historically,93 percent of its customers take advantage of the discount.What is the firm's average collection period?
A)7.91 days
B)7.67 days
C)8.20 days
D)8.33 days
E)9.08 days
Q2) Which of these tends to create an unexpected increase in a firm's average collection period?
A)Increased credit sales
B)The implementation of a cash discount
C)Increased customer delinquencies
D)Increased dollar value per each sale
E)Increased collection efforts
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19
Chapter 18: International Aspects of Financial Management
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Q1) The spot rate on the Canadian dollar is 1.15.Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S.What is the expected exchange rate three years from now?
A)C$1.1960
B)C$1.1363
C)C$1.2613
D)C$1.1108
E)C$1.1071
Q2) Assume you can currently exchange $1 for ¥100.Also assume the inflation rate will be 2.5 percent annually in the U.S.and 2 percent in Japan.Given these assumptions,how many yen should you expect in exchange for $1 next year?
A)More than 100
B)Either 100 or more than 100
C)Exactly 100
D)Either 100 or less than 100
E)Less than 100
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