Financial Decision Making
Exam Solutions
Course Introduction
Financial Decision Making explores the essential concepts, tools, and analytical frameworks required to make effective financial decisions within organizations and personal contexts. The course covers topics such as financial statement analysis, budgeting, risk assessment, capital structure, investment appraisal, and the time value of money. Students will learn to interpret financial information, evaluate investment opportunities, and understand the impact of financial decisions on organizational performance. Through practical case studies and real-world applications, the course prepares students to make informed financial choices that align with both short-term goals and long-term strategic objectives.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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21 Chapters
2363 Verified Questions
2363 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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123 Verified Questions
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Sample Questions
Q1) Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.
A)True
B)False
Answer: False
Q2) Which of the following statements is not true of secondary markets?
A) After securities are sold to the public, they are traded in the secondary market between investors.
B) The secondary market prices are continually changing as investors buy and sell securities.
C) The sale of securities is made in the secondary market by way of a new issue.
D) In the secondary market, financial managers are given feedback about their firm's performance.
Answer: C
Q3) Risk management will be an important factor over the next decade.
A)True
B)False
Answer: True
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The major limitation of financial statements are
A) their complexity.
B) their lack of comparability.
C) their use of historical cost accounting.
D) their lack of detail.
Answer: C
Q2) Total assets of a firm are paid for with liabilities and stockholders' equity.
A)True
B)False
Answer: True
Q3) The book value per share is based off of ________ data, while the market value per share is based off of ________ data.
A) short term; long term
B) future; historical
C) historical; future
D) long term; short term
Answer: C
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Chapter 3: Financial Analysis
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) Profitability ratios allow one to measure the ability of the firm to earn an adequate profit compared to sales, total assets, and invested capital.
A)True
B)False
Answer: True
Q2) Ratio analysis can be useful for
A) historical trend analysis within a firm.
B) comparison of ratios within a single industry.
C) measuring the effects of debt or equity financing.
D) All of the options are true.
Answer: D
Q3) Trend and industry analysis provide all of the following information except A) benchmarking.
B) the progress of the company.
C) a basis for decision making about capital structure.
D) future information about the company.
Answer: D
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A) $7,500
B) $8,000
C) $7,900
D) $8,100
Q2) The percent-of-sales method would be more accurate under a steady sales assumption than with cyclical sales.
A)True
B)False
Q3) The balance sheet represents declining changes in the corporation over time.
A)True B)False
Q4) As the dividend payout ratio declines, more external funds are required. A)True
B)False
Q5) Growth in sales volume prevents a shortage of cash funds. A)True
B)False
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Chapter 5: Operating and Financial Leverage
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102 Flashcards
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Sample Questions
Q1) Green Co. has total debt of $400,000, a cost to borrow funds of 6%, and an EBIT of $42,500. From a financial perspective, Green Co. has profits at A) breaking even.
B) lower than the breakeven point.
C) higher than the break-even point.
D) in need of new financing.
Q2) Which of the following is concerned with the change in operating profit as a result of a change in unit volume?
A) Financial leverage
B) Break-even point
C) Operating leverage
D) Combined leverage
Q3) If a firm with $49,000 in fixed costs breaks even on 7,000 units, how many units must the firm sell to earn $30,000 in operating profit?
A) 30,000 units
B) 11,286 units
C) 15,824 units
D) There is not enough information to determine the unit sales required.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Short-term interest rates have historically been more volatile than long-term rates.
A)True
B)False
Q2) An aggressive working capital policy would have which of the following characteristics?
A) A high ratio of long-term debt to fixed assets
B) A low ratio of short-term debt to fixed assets
C) A high ratio of short-term debt to long-term sources of funds
D) A short average collection period
Q3) The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets.
A)True
B)False
Q4) Ideally, permanent current assets should be financed exclusively with short-term borrowings.
A)True
B)False
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Chapter 7: Current Asset Management
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140 Flashcards
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Sample Questions
Q1) There are two kinds of float: mail float and clearing float.
A)True
B)False
Q2) Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. Five percent will be uncollectible. The collection cost on all accounts is 3% of new sales, the cost of producing and selling is 80% of sales, and the firm is in the 21% tax bracket. What is the profit on new sales?
A) $8,532
B) $9,660
C) $7,245
D) $10,710
Q3) Minimizing cash balances can improve overall corporate profitability.
A)True
B)False
Q4) All of the following are methods of controlling receivables except A) offering a cash discount.
B) reducing net terms.
C) using DBIS.
D) reducing cash sales.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) What is generally the largest source of short-term credit for small firms?
A) Bank loans
B) Commercial paper
C) Installment loans
D) Trade credit
Q2) Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the accounts receivable to the buyer.
A)True
B)False
Q3) Leontief's Wigs can take a cash discount but has to borrow money from the bank to do so. The bank offers a 16% interest rate. The terms of the cash discount are 2/10, net 60. Because of this, Leontief's should borrow from the bank to take the discount.
A)True
B)False
Q4) On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Compounding more than once a year (semiannually, quarterly, or monthly) will increase the interest rate and number of periods used in the calculations.
A)True
B)False
Q2) If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, how much would you have as an ending balance in your account?
A) $6,975
B) $15,937
C) $7,716
D) $13,181
Q3) When adjusting for semiannual compounding of an annuity, the adjustments include multiplying the periods and annuity payment amount by 2.
A)True
B)False
Q4) Discounted at 6%, $1,000 received three years from now is worth less than $800 received today.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The market-determined required rate of return is the appropriate discount rate used in valuation calculations.
A)True
B)False
Q2) The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the
A) risk premium.
B) inflation premium.
C) dividend yield.
D) discount rate.
Q3) The discount rate depends on the market's perceived level of risk associated with an individual security.
A)True
B)False
Q4) The market allocates capital to firms based on all of the following except:
A) Higher risk requires lower returns due to higher expectations
B) The level of efficiency
C) Expected returns
D) The degree of past performance
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 21%?
A) 3.30%
B) 4.93%
C) 5.79%
D) 6.11%
Q2) A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (K<sub>p</sub> = D/P<sub>0</sub> + g).
A)True
B)False
Q3) A firm in a stable industry should use
A) a large amount of debt to lower the cost of capital.
B) no debt at all.
C) preferred stock in place of debt.
D) a limited amount of debt to lower the cost of capital.
Q4) The use of the optimum capital structure minimizes the cost of capital.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) With the exception of real estate investments, MACRS depreciation is beneficial to corporations because it
A) increases total depreciation.
B) lengthens the lives of assets for depreciation purposes.
C) shortens the lives of assets for depreciation purposes.
D) classifies assets into specific, well-understood groups for depreciation purposes.
Q2) In most capital budgeting decisions, the emphasis should be on reported earnings rather than cash flows.
A)True
B)False
Q3) As the cost of capital increases
A) fewer projects are accepted.
B) more projects are accepted.
C) project selection remains unchanged.
D) None of these options
Q4) Capital budgeting decisions involve a minimum time horizon of five years.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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90 Flashcards
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Sample Questions
Q1) The coefficient of variation considers how an investment impacts the total risk of the firm, while the coefficient of correlation considers the specific risk of an investment.
A)True
B)False
Q2) Sensitivity analysis helps the financial planner determine how sensitive shareholders will be to changes in investment strategy.
A)True
B)False
Q3) Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's stock price.
A)True
B)False
Q4) Risk may be integrated into capital budgeting decisions by
A) adjusting the standard deviation of possible outcomes.
B) determining the expected value.
C) adjusting the discount rate.
D) adjusting the time horizon.
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Chapter 14: Capital Markets
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their firm's financial statements.
A)True
B)False
Q2) The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities.
A)True
B)False
Q3) The "semi-strong" form of the efficient market hypothesis states that
A) past price data is unrelated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) none of these options are correct.
Q4) The major supplier of funds for investment in the whole economy is
A) businesses.
B) households.
C) government.
D) financial institutions.
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Page 16
Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Shelf registration has helped larger investment banking firms become larger, while smaller investment banking firms are left behind.
A)True
B)False
Q2) Which of the following is considered an advantage (for the issuing corporation) of going public?
A) The president becomes more of a "public relations person"
B) Ownership is more controlled by the company
C) Increased liquidity for the corporation's shareholders
D) Increasing the amount of shares authorized to sell
Q3) If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
A)True
B)False
Q4) Privatization in many foreign markets means selling companies to the public that were previously owned by the state or government.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Long-term bond prices are more volatile than short-term bond prices, given an equal percentage change in the interest rate.
A)True
B)False
Q2) Under a sinking fund arrangement, semiannual or annual contributions are made by the corporation into a fund administered by a trustee for purposes of debt retirement.
A)True B)False
Q3) When interest rates rise, bond refunding becomes quite popular.
A)True
B)False
Q4) Senior debentures usually provide lower interest rates than junior secured debt.
A)True
B)False
Q5) Which of the following bonds offers the most security to the bondholder?
A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bonds
D) Income bonds
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Participating preferred stock is advantageous to common stockholders because it receives more dividends.
A)True B)False
Q2) The "convertible exchangeable" feature of preferred shares gives companies the sole right to force preferred stock holders to exchange for common stock.
A)True B)False
Q3) Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.
A)True
B)False
Q4) If the current market value of Markowitz Corp stock is $61 and 10 rights are required to buy one additional share of Markowitz at the subscription price of $50, then the rights are worth $1.00.
A)True B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Distribution of 20-25% or greater of outstanding shares as a stock dividend is generally treated as a stock split.
A)True
B)False
Q2) One reason that investors may prefer stock dividends over cash dividends is so the investor is provided with some growth or life cycle information about the company.
A)True
B)False
Q3) A stock split involves a reduction in the firm's retained earnings account.
A)True
B)False
Q4) Generally, dividends should be changed when a corporation reaches a new level of permanent income.
A)True
B)False
Q5) With a dividend reinvestment plan, an investor might receive fractional shares. A)True B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The intrinsic value of a warrant to buy four shares of Merton stock at $53 per share is $20. What is the current market price of Merton stock?
A) $55.00
B) $59.00
C) $58.00
D) None of these options are correct
Q2) A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is
A) a common stock.
B) an option.
C) a futures contract.
D) a capital investment.
Q3) The downside protection of a convertible bond's floor value insulates the investor from any possible loss.
A)True
B)False
Q4) Basic earnings per share includes all convertible bonds outstanding.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The potential of a tax loss carryforward has no effect when considering the acquisition of a company.
A)True
B)False
Q2) Which of the following types of mergers decreases competition?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
Q3) Synergy is said to occur when the whole is
A) equal to the sum of the parts.
B) less than the sum of the parts.
C) greater than the sum of the parts.
D) greater than or equal to the sum of the parts.
Q4) Which of the following types of mergers goes against the antitrust policy?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
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Chapter 21: International Financial Management
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Sample Questions
Q1) If one Czech crown is equal to $0.05 U.S. dollar, the U.S. dollar is equal to how many Czech crowns?
A) 25.00
B) 4.00
C) 20.00
D) 400.00
Q2) Which of the following is an inducement for foreign investment in the United States?
A) Shortage of land in foreign countries
B) Advanced technology
C) Large market size
D) All of these options are inducement for investment in U.S.
Q3) The value of a country's currency may increase by
A) continuous excessive government spending.
B) a stock market rally in that country.
C) an increase in that country's money supply.
D) More than one of the options is correct.
Q4) One benefit in joining the "Eurozone" was to have easy access to borrowing.
A)True
B)False
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