Financial Decision Making
Midterm Exam
Course Introduction
Financial Decision Making explores the principles and techniques essential for making informed financial choices in both personal and organizational contexts. The course covers key topics such as time value of money, risk and return analysis, capital budgeting, financial statement analysis, and cost of capital. Students learn to apply quantitative and qualitative methods to evaluate investment projects, financing options, and resource allocation strategies. Practical case studies and real-world scenarios are used to develop critical thinking and decision-making skills, preparing students to address complex financial challenges and maximize value in diverse business environments.
Recommended Textbook
Fundamentals of Corporate Finance 5th Canadian Edition by Richard A Brealey
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Page 2
Chapter 1: Goals and Governance of the Firm
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Q1) A common problem for closely held corporations is:
A)Lack of access to substantial amounts of capital.
B)That shareholders receive only one vote each.
C)The separation of ownership and management.
D)An abundance of agency problems.
Answer: A
Q2) Firms can alter their capital structure by:
A)Not accepting any capital budgeting projects.
B)Investing in non-tangible assets.
C)Issuing stock to repay debt.
D)Becoming a limited liability company.
Answer: C
Q3) One continuing problem with managerial incentive-compensation plans is that:
A)The plans increase agency problems.
B)Managers prefer guaranteed salaries.
C)Effectiveness of the plans is difficult to evaluate.
D)The plans do not reward shareholders.
Answer: C
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3
Chapter 2: Financial Markets and Institutions
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Q1) Why are secondary market transactions of importance to corporations?
Answer: Although corporations do not generate cash flows from secondary market transactions (other than those they initiate), it is the existence of secondary markets that made many investors comfortable enough to invest in their primary market offerings.In other words, if investors felt there would not be an organized, convenient market in which to alter their portfolio of securities, their original investment decisions might be quite different.Also, the secondary market acts as a form of "scorecard" for the decisions of management and the general prospects of the firm.Market values are, in most instances, much more important than book values, thus values in the secondary market give investors and analysts alike the ability to evaluate a firm.These evaluations will also affect future primary market offerings.
Q2) Which of the following financial intermediaries can loan money directly to businesses?
A)Mutual funds
B)Pension funds
C)Insurance companies
D)Mutual funds, pension funds, and insurance companies.
Answer: C
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Page 4
Chapter 3: Accounting and Finance
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Q1) Why does accounting of income differ from cash flow?
Answer: Income is not the same as cash flow.There are two reasons for this: (1) investment in fixed assets is not deducted immediately from income but is instead spread over the expected life of the equipment, and (2) the accountant records revenues when the sale is made rather than when the customer actually pays the bill, and at the same time deducts the production costs even though those costs may have been incurred earlier.
Q2) An increase in the accounts receivable balance provides an increase in cash flow.
A)True
B)False
Answer: False
Q3) Which of the following information is reported on the income statement?
A)Accounts Payable
B)Revenues, Expenses, and Net Income or Net Loss
C)Current liabilities
D)Current portion of long-term debt
Answer: B
Q4) What are the firm's earnings before interest and taxes?
Answer: 11ea68e2_3ec4_6fe6_935e_31662b342463_TB1770_00
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Chapter 4: Measuring Corporate Performance
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Q1) Look at and compare the financial ratios across industries.The retail industry has a much higher turnover of receivables (a shorter collection period) than other industries, while software companies have high inventory turnover (low days in inventory).What do you think accounts for these differences?
Q2) Which of the following facts might make a firm's interval measure too optimistic?
A)The cost of raw materials has been decreasing
B)The average collection period continues to increase
C)A large component of marketable securities will mature soon
D)The firm's cash is not earning any interest
Q3) A company with long-term debt of 80, lease obligations of 20, total assets of 1,000, and total liabilities of 350 has a:
A)Total debt ratio of approximately .10
B)Total debt ratio of approximately .23
C)Long-term debt ratio of approximately .15
D)debt-to-equity ratio of approximately .15 Equity = 1000 - 350 = 650
Q4) ROE is equal to ROA when the firm has no debt.
A)True
B)False
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Page 6
Chapter 5: The Time Value of Money
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Q1) What is the annually compounded rate of interest on an account with an APR of 10 percent and monthly compounding?
A)10.00 percent
B)10.47 percent
C)10.52 percent
D)11.05 percent
Q2) An annuity factor represents the future value of $1 that is deposited today.
A)True
B)False
Q3) What will be the approximate population of the United States, if its current population of 275 million grows at a compound rate of 2 percent annually for 25 years?
A)413 million
B)430 million
C)451 million
D)466 million
Q4) Nominal dollars refer to the amount of purchasing power.
A)True
B)False
Q5) Explain the difference between a very long annuity and a perpetuity.
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Chapter 6: Valuing Bonds
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Q1) What price will be paid for a Canadian government bond with an ask price of 122.28?
A)$1,122.28
B)$1,228.88
C)$1,280.00
D)$1,222.80
Q2) Capital losses will automatically be the case for bond investors who buy:
A)Discount bonds
B)Premium bonds
C)Zero-coupon bonds
D)Junk bonds
Q3) Explain why it is necessary for bond prices to fluctuate in response to changing interest rates?
Q4) The value of a callable bond:
A)is unlimited
B)Is limited by its face value
C)Is limited by its call price
D)Is limited by high interest rates
Q5) Explain why bond investors may be interested in Canada real return bonds rather than traditional bonds.
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Chapter 7: Valuing Stocks
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Q1) Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio.
A)True
B)False
Q2) A company with a return on equity of 15% and a plowback ratio of 60% would expect a constant growth rate of:
A)4%
B)9%
C)21%
D)25%
Q3) For a firm that expects earnings next year of $10.00 per share, has a plowback ratio of 35%, a return on equity of 20%, and a required return of 15%, show the current stock value and next year's expected stock value, assuming that growth is to be constant.
Q4) According to the dividend discount model, the current value of a stock is equal to the:
A)Present value of all expected future dividends
B)Sum of all future expected dividends
C)Next expected dividend, discounted to the present
D)Discounted value of all dividends growing at a constant rate
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) A Project's opportunity cost of capital is:
A)The forgone return from investing in the project
B)The return earned by investing in the project
C)Equal to the average return on all company projects
D)Designed to be less than the Project's IRR
Q2) When the NPV of an investment is positive, then the IRR will be:
A)Equal to the opportunity cost of capital
B)Greater than the opportunity cost of capital
C)less than the opportunity cost of capital
D)Less than or equal to the opportunity cost of capital
Q3) For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.
A)True
B)False
Q4) What should occur when a Project's net present value is determined to be negative?
A)The discount rate should be decreased
B)The profitability index should be calculated
C)The present value of the project cost should be determined
D)The project should be rejected
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Q1) A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable.Assuming these amounts remain constant, by how much has net working capital increased?
A)$5,000
B)$25,000
C)$30,000
D)$45,000
Q2) Offer examples to confirm that firms do experience opportunity costs, even when cash payments are not explicitly made.
Q3) Opportunity costs for organizational resources:
A)are limited to the explicit cash flows involved
B)Are determined according to the marginal tax rate
C)Can involve no cash flows
D)Should not be determined for existing products
Q4) When assets are sold from a CCA pool:
A)Other assets' values increase
B)The assets sold continue in the pool
C)A new rate is used in the pool
D)The remaining pool is subject to the net acquisitions rule
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Chapter 10: Project Analysis
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Q1) According to decision-tree analysis, investment projects should be discontinued when:
A)The probability of success is less than 50 percent
B)NPV is calculated to be negative
C)DOL increases from previous levels
D)The possibility of a failing outcome exists
Q2) The greater the DOL, the greater the protection against operating losses during economic downturns.
A)True
B)False
Q3) What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?
A)It raises the break-even level
B)It reduces the break-even level
C)It has no effect on the break-even level
D)This cannot be determined without knowing the length of the investment horizon
Q4) Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.
Q5) Define DOL, discuss what affects it and how to interpret it.
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost
of Capital
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Q1) What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share one year later for $28.50?
A)-5 percent
B)0 percent
C)5 percent
D)10 percent
Q2) Which of the following statements is incorrect concerning stock indexes?
A)They have been developed for foreign stocks
B)They have been developed for smaller companies
C)Indexes include all common stocks
D)Some indexes are equal-weighted
Q3) Calculate the nominal and real returns for the following corporate bond investment: Purchased for $840 one year ago, 4 percent coupon rate, sold for $894.The inflation rate was 5.0 percent during the year.Would you consider this an appropriate investment if Treasury bills had yielded 6.0 percent over the same period? Why?
Q4) Average returns on high-risk assets are higher than those on low-risk assets.
A)True
B)False
Q5) Discuss the concept of a "negative risk asset."
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) The sensitivity of a stock's returns to the returns on a market portfolio is referred to as the:
A)Stock's market risk premium
B)Stock's Beta
C)Market portfolio's systematic risk
D)Stock's unique risk
Q2) If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.
Q3) Treasury bills have a Beta of zero.
A)True
B)False
Q4) Investors expect aggressive stocks to outperform the market periods of strong economic activity.
A)True
B)False
Q5) One of the easiest methods of diversifying away firm-specific risks is to:
A)Buy stocks with a Beta of 1.0.
B)Build a portfolio with 20-25 individual stocks.
C)Purchase the shares of a mutual fund.
D)Purchase stocks that plot above the security market line.
Page 14
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) An increase in a firm's debt ratio will have no effect on the required rate of return for equity holders.
A)True
B)False
Q2) For a company that pays no corporate taxes, its WACC will be equal to:
A)The expected return on its assets
B)The expected return on its debt
C)The total value of its assets
D)The expected return on its equity
Q3) The company cost of capital does not make an adjustment for the tax effect.
A)True
B)False
Q4) What is the pretax cost of debt for a firm in the 35% tax bracket that has a 9% after-tax cost of debt?
A)5.85%
B)12.15%
C)13.85%
D)25.71% after-tax cost of debt = pretax cost x (1 - tax rate) 9% = pretax cost x .65
Q5) Can WACC be used to value an entire business?
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Chapter 14: Introduction to Corporate Financing and Governance
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Q1) Market value is usually greater than book value because:
A)Inflation drives market value above original costs
B)Inflation drives book value below original costs
C)Firms tend to invest in projects with very high book values
D)The cost of capital drives market value up
Q2) When firms retain cash, they are generating funds internally by increasing shareholder investment.
A)True
B)False
Q3) For most firms, the majority of their funding is generated internally.
A)True
B)False
Q4) When bonds are selling at par value, the bonds are known as fixed-rate bonds. A)True
B)False
Q5) Show the capital accounts at the end of the first year of operation for a firm that, at the beginning of the year, issued 50,000 shares of $1.50 par value common stock for $15 per share, repurchased 5,000 shares during the year at $20 per share, and paid out 40 % of earnings as dividends with a 50 cent per share dividend.
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Chapter 15: Venture Capital, Ipos, and Seasoned Offerings
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Q1) Currently, M & S Inc.has 2 million shares outstanding selling at $70 a share.A rights issue will be made that allows 1 share to be purchased for every 5 shares currently held by stockholders for $40 each.Which of the following is true?
A)The number of shares outstanding will fall to 1.6 million
B)The firm will raise $13.33 million
C)The stock price will fall to $65
D)The total value of the firm will equal $124 million Number of shares issued (2 million/5) = 400,000
Number of shares outstanding 2 million + 0.4 million = 2.4 million
Firm will raise $40 x 400,000 = $16 million
Total value of firm will increase from $140 million to $156 million
Q2) What is the primary reason for a reduction in share value after a successful rights issue? The new shares:
A)Have higher underwriting expense
B)Are offered at attractive prices
C)Reduce the firm's return on equity
D)Do not include voting rights
Q3) How do firms make initial public offerings and what are the costs of such offerings?
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Chapter 16: Debt Policy
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Q1) Costs of distress are greater when a large amount of __________ affect(s) the prosperity of the firm.
A)Intangible assets
B)Tangible assets
C)Net working capital
D)Retained earnings
Q2) At some debt-equity ratio, the costs of financial distress are expected to overcome the value of the tax shield for a firm.
A)True
B)False
Q3) The WACC is used to value:
A)Projects with any risk
B)Projects with the same risk as the firm's current business
C)Projects with the same risk as the firm's debt
D)Projects with the same risk as the firm's equity
Q4) The interest tax shield is equal to the:
A)Difference between interest expense and income taxes
B)Amount of interest paid in a given year
C)Product of the interest expense and the tax rate
D)Product of the debt principal and the interest rate on debt
Page 18
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Chapter 17: Payout Policy
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Q1) Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?
A)There is reasonable assurance of asset title transfer at the end of the lease
B)The lessee will receive all or most of the asset's economic benefits
C)The lessor is guaranteed a profit on the lease equal to that of other investments
D)The lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment
Q2) All but one of the following are reasons for leasing:
A)Companies with a weak credit rating can obtain financing because the lessor retains title to the asset.
B)Payments on a lease are variable, and therefore removes an additional element of uncertainty.
C)The terms offered under a lease may be more attractive than those that a customer could get under a comparable loan.
D)Leases provide the lessee with flexibility and insurance against obsolescence.
Q3) Provide a critique of two weak or dubious reasons for leasing.
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Chapter 18: Long-Term Financial Planning
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Q1) The stock in your portfolio was selling for $40 per share yesterday, but has today declared a three for two split.Which of the following statements seems to be true?
A)There will be two-thirds as many shares outstanding, and they will sell for $60.00 each
B)There will be four times as many shares outstanding, and they will sell for $160.00 each
C)There will be 50% more shares outstanding, and they will sell for $26.67 each
D)There will be one-and-one-half times as many shares outstanding, and they will sell for $60.00 each
Q2) A company may choose to repurchase stock rather than pay out dividends when:
A)The company wants to distribute excess cash to its investors
B)The company wants to give its investors a bumper dividend
C)The company does not want to make a commitment to distribute more cash
D)The company does not want to embark on unprofitable ventures
Q3) Which of the following is the order in which key dividend dates occur:
A)Declaration, with-dividend, record, ex-dividend, payment
B)Declaration, with-dividend, ex-dividend, record, payment
C)Record, declaration, with-dividend, payment, ex-dividend
D)With-dividend, ex-dividend, record, declaration, payment
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Chapter 19: Short-Term Financial Planning
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Q1) The rate at which the assets of a firm can grow without the requirement of external sources of financing is the:
A)Internal growth rate
B)Sustainable growth rate
C)Pro forma growth rate
D)Plowback rate
Q2) A firm's internal growth rate of 10% means that:
A)Sales can grow by 10% before external equity is needed
B)Retained earnings can increase by 10% before total assets will change
C)External capital will not be required unless sales growth exceeds 10%
D)Debt can increase by 10% before retained earnings will fall
Q3) A firm's goal is to maintain a 75% debt-equity ratio.How much equity would be required if the results of a financial planning model indicate that the firm's assets will grow to $4 million?
A)$1.00 million
B)$1.71 million
C)$2.29 million
D)$3.00 million If debt is 75% as large as equity, then: 1)75 equity = $4.0 million
Q4) What is the effect of growth on the need for external financing?
Page 21
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Chapter 20: Working Capital Management
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Q1) A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?
A)12.03%
B)13.00%
C)14.05%
D)15.87% Effective Annual Rate with Compensating Balances =
Q2) The goal of managing working capital, such as inventory, should be to minimize the: A)Costs of carrying inventory
B)Opportunity cost of capital
C)Aggregate of carrying and shortage costs
D)Amount of spoilage or pilferage
Q3) What is the length of the cash conversion cycle for a firm with $55,000 in average inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?
Q4) Net working capital will decrease when a firm buys raw materials on credit.
A)True
B)False
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Page 22
Chapter 21: Mergers, Acquisitions, and Corporate Control
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Q1) What is the ledger balance on your account?
Q2) Paying a supplier in Toronto with a cheque drawn on a bank in New Brunswick is an example of:
A)Cheque kiting
B)Remote wire transfer
C)Concentration banking
D)Remote disbursement
Q3) What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7 percent?
A)$5,250
B)$13,125
C)$21,000
D)$300,000 Annual savings = average collections x time saved x annual interest rate = 150 x $500 x (2.5 + 1.5) x .07
Q4) A corporation has excess cash that does not appear to be needed for several months.How can they evaluate the differences between parking their funds in commercial paper versus repurchase agreements?
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Chapter 22: International Financial Management
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Q1) Which of the following would not be a customary source of credit information on customers?
A)Dun & Bradstreet
B)Canada Customs and Revenue Agency
C)Credit Bureau
D)Customer's bank
Q2) CumChan manufacturing is considering an alternate to its credit policy.At present, the firm sells its product at $42 per unit with monthly sales of 61,000 units.Fifteen% of all sales are for cash; the remainder sold on terms of net 30.The present average cost per unit is $13, and the marginal cost for the next 6,000 units is $20 per unit.Sales are expected to increase by 4,000 units per month if credit terms are altered to 3/15, 1/30, net 60.Cash sales are expected to remain at 15% of total sales.It is expected that 25% of future credit sales will be paid after 15 days, 35% after 30 days, and the remainder after 60 days.The company's tax rate is 45%, and its required after-tax rate of return on investments in receivables is 5% after tax.Should the firm alter its credit terms as indicated?
Q3) Discuss the premise behind the validity of a numerical credit scoring system.
Q4) How do firms assess the probability that a customer will pay?
Q5) What are the usual steps in credit management?
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Chapter 23: Options
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Q1) It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine their operations.
A)True
B)False
Q2) One of the reasons why proxy fights are rarely successful is that:
A)Management is always viewed as performing their jobs well
B)Management can use corporate resources to defend against the fight
C)Mergers are a cheaper form of changing management
D)Shareholders are unconcerned with corporate management
Q3) An acquiring company is considering a takeover of a target company.The acquiring company has 10 million shares outstanding with $40 per share.The target company has 5 million shares outstanding which sell for $20 per share.If the acquiring company estimates that merger gains will be $20 million, determine what the highest price will be paid per share for the target.
A)$24
B)$26
C)$28
D)$30
Q4) What are some of the motivations for leveraged buyouts?
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Chapter 24: Risk Management
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Q1) If the difference between forward and spot exchange rates is positive, interest rate parity would predict that:
A)The difference in interest rates between countries will be negative
B)The difference in interest rates between countries will be positive
C)There will be no difference in interest rates between countries
D)The difference will be quickly eliminated
Q2) If you are a currency speculator, you will always make money by:
A)Buying currency with high interest rate
B)Buying currency with low interest rate
C)Accurately predicting whether exchange rate will change more or less than the interest rate differential
D)Buying the currency with the highest interest rate differential
Q3) What is the difference between forward and spot exchange rate rates?
Q4) Indirect quotes describe units of domestic currency bought by a unit of foreign unit.
A)True
B)False
Q5) What is the law of one price? When would you expect it to hold and when would you not expect it to hold?
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Chapter 25: Conclusion
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Q1) An investor who is buying a put option is expecting:
A)Stock prices to go up
B)Stock prices to go down
C)Interest rates to go up
D)Interest rates to go down
Q2) When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:
A)Less the value of the dividend
B)Less the value of the option
C)Less the present value of the exercise price
D)Less the exercise price
Q3) When the stock price is very high compared to the exercise price, the call option premium approximates the difference between the stock price and strike price.
A)True
B)False
Q4) What is the payoff to buyers and sellers of call and put options?
Q5) What is a callable bond and how is its value determined?
Q6) What options may be provided in financial securities?
Q7) Why would bondholders be willing to pay more for bonds that contain warrants?
Page 27
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Chapter 26: What We Do and Do Not Know About Finance
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Source URL: https://quizplus.com/quiz/49980
Sample Questions
Q1) There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.
Q2) Managers are willing to pay a price to hedge because:
A)They receive increased profits in return
B)The returns on derivative instruments are not taxed
C)They value the reduction in uncertainty
D)It permits the managers to receive higher cash bonuses
Q3) The seller of a copper futures contract noticed that her account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper, what happened that day to the price of copper?
A)The price closed down $0.02 per pound
B)The price closed up $0.02 per pound
C)The price closed down $0.20 per pound
D)The price closed up $0.20 per pound
Q4) Counterparties to an interest rate swap exchange both interest payments and principal amounts.
A)True
B)False
Q5) 119.Discuss the statement, "managers are not paid to avoid risk".
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