Financial Decision Making
Midterm Exam
Course Introduction
Financial Decision Making explores the core principles, frameworks, and analytical tools essential for making informed financial decisions in modern organizations. The course covers topics such as financial statement analysis, capital budgeting, risk assessment, cost of capital, and valuation. Emphasizing both quantitative analysis and strategic thinking, students learn how to evaluate investment opportunities, optimize capital structure, and manage resources effectively to achieve organizational goals. Through case studies and real-world scenarios, students develop the critical skills needed to tackle complex financial challenges faced by managers and business leaders.
Recommended Textbook
Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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19 Chapters
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3256 Flashcards
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it is yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are ________.
A) $3,000 and $10,000, respectively
B) $3,000 and -$7,000, respectively
C) $7,000 and -$3,000, respectively
D) $3,000 and $7,000, respectively
Answer: B
Q2) The primary activity of a financial manager is ________.
A) analyzing accrued earnings
B) making an investment decision
C) preparing organization charts
D) auditing financial statements
Answer: B
Q3) Financing decisions deal with the left-hand side of the firm's balance sheet.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon interest rate of 8%. The maturity of the bond is 15 years. Where should this bond be traded?
A) forex market
B) money market
C) capital market
D) commodities market
Answer: C
Q2) The shadow banking system describes a group of institutions that engage in lending activities, much like traditional banks.
A)True
B)False
Answer: True
Q3) Recessions associated with a banking crisis tend to be more severe than other recessions because many businesses rely on credit to operate.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.
A)True
B)False
Answer: False
Q2) A firm with a low net profit margin can improve its return on total assets by ________.
A) increasing its debt ratio
B) increasing its total asset turnover
C) decreasing its fixed asset turnover
D) decreasing its total asset turnover
Answer: B
Q3) Operating profit is known as ________.
A) earnings after interest and taxes
B) earnings before interest and taxes
C) earnings before depreciation and taxes
D) earnings after tax
Answer: B
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Page 5
Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) Which of the following is a source of cash flows?
A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock
Q2) Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.
A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen
Q3) Which of the following is a cash inflow?
A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities
Q4) If the ending cash is greater than the minimum cash balance, excess cash exists.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.
Q2) Herbert has opened a retirement fund account which pays 7 percent interest and requires $5,000 annual deposits. Herbert will retire in 15 years and expects 10 years of retirement life. What is the maximum annual retirement benefit Herbert can get during his retirement years?
Q3) If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
Q4) If the present value of a perpetual income stream is increasing, the discount rate must be ________.
A) increasing
B) decreasing
C) changing unpredictably
D) increasing proportionally
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)
Q2) What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.
Q3) IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.
A)True
B)False
Q4) Valuation is the process that links risk and return to determine the worth of an asset. A)True
B)False
Q5) A yield curve that reflects relatively similar borrowing costs for both short- and long-term loans is called a normal yield curve.
A)True
B)False
Q6) Explain liquidity, default risk, and maturity risk premiums.
Q7) Calculate the current value of Bond M. (See Table 6.2)
Page 8
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.
A)True
B)False
Q2) Unlike equityholders, creditors are owners of the firm.
A)True
B)False
Q3) Interest paid to bondholders is tax deductible.
A)True
B)False
Q4) Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued.
A)True
B)False
Q5) Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
A)True
B)False
Q6) Calculate the estimated dividend for 2015. (See Table 7.1)
Page 9
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Chapter 8: Risk and Return
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Sample Questions
Q1) Risk aversion is the behavior exhibited by managers who require ________.
A) an increase in return, for a given decrease in risk
B) an increase in return, for a given increase in risk
C) no changes in return, for a given increase in risk
D) decrease in return, for a given increase in risk
Q2) The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.
A)True
B)False
Q3) Total security risk is the sum of a security's nondiversifiable and diversifiable risk.
A)True
B)False
Q4) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) One measure of the cost of common stock equity is the rate at which investors discount the expected common stock dividends of the firm to determine its share value. A)True B)False
Q2) Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is ________.
A) new common stock, retained earnings, preferred stock, long-term debt
B) common stock, preferred stock, long-term debt, short-term debt
C) preferred stock, new common stocks, common stock, retained earnings
D) long-term debt, preferred stock, retained earnings, new common stock
Q3) Historical weights are the present value of market price based on the actual historical capital structure proportions. A)True B)False
Q4) Preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders. A)True B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) If a project's IRR is greater than the cost of capital, the project should be rejected.
A)True
B)False
Q2) Which of the following is true of the accept-reject approach?
A) It involves ranking projects on the basis of some predetermined measure, such as the rate of return.
B) It cannot be used when the firm has limited funds.
C) It can be used for making capital budgeting decisions when there is capital rationing.
D) It can be used only for evaluating mutually exclusive projects.
Q3) A firm can accept a project with a net present value of zero because ________.
A) the project would maintain the wealth of the firm's owners
B) the project would enhance the wealth of the firm's owners
C) the project would maintain the earnings of the firm
D) the project would enhance the earnings of the firm
Q4) If a project's payback period is less than the maximum acceptable payback period, we would accept it.
A)True
B)False
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Page 12
Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows.
A)True
B)False
Q2) The incremental depreciation expense for year 1 is ________. (See Table 11.3)
A) $2,250
B) $7,600
C) $7,000
D) $7,950
Q3) The tax effect on the sale of the existing asset results in ________. (See Table 11.3)
A) $800 tax benefit
B) $1,000 tax liability
C) $1,100 tax liability
D) $6,000 tax liability
Q4) Should financing costs such as the returns paid to bondholders and stockholders be considered in computing after-tax operating cash flows? Why or why not?
Q5) Calculate the initial investment of the new asset. (See Table 11.1)
Q6) Calculate the initial investment required for the new asset. (See Table 11.4)
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Chapter 12: Risk and Refinements in Capital Budgeting
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Q1) The two basic types of risk associated with international cash flows are inflation and foreign exchange risks and political risks.
A)True
B)False
Q2) Which of the following is an important type of risk in an international capital budgeting context?
A) business cycle risk
B) political risk
C) appropriation risk
D) default risk
Q3) Using the risk-adjusted discount rate method of project evaluation, the NPV for Project N is ________. (See Table 12.3)
A) $166,132
B) $122,970
C) $85,732
D) $600,000
Q4) What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between Projects X and Y (See Table 12.5).
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is ________.
A) 1.07
B) 1.11
C) 1.18
D) 1.23
Q2) The operating breakeven point can be found by solving for the sales level that just covers total fixed and variable costs.
A)True
B)False
Q3) In case of a manufacturing organization, which of the following is a variable cost that varies directly with the sales volume?
A) interest cost
B) dividend cost
C) shipping cost
D) rental cost
Q4) Assuming a 40 percent tax rate, what is the financial breakeven point for each plan?
(See Table 13.1)
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Chapter 14: Payout Policy
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Sample Questions
Q1) At a firm's quarterly dividend meeting held on December 5, the directors declared a $1.50 per share cash dividend to be paid to the holders of record on Monday, January 1. Before the dividend was declared, the firm's accumulated retained earnings balance and cash balance were $1,280,000 and $30,000 respectively. The firm has 10,000 shares of common stock outstanding. On January 2, the cash, dividends payable, and retained earnings accounts had balances of ________.
A) $15,000, $0, and $1,265,000, respectively
B) $30,000, $15,000, and $1,280,000, respectively
C) $30,000, $0, and $1,265,000, respectively
D) $15,000, $0, and $1,280,000, respectively
Q2) Payout policy refers to the decisions that firms make about whether to distribute cash to shareholders, how much cash to distribute, and by what means the cash should be distributed.
A)True
B)False
Q3) The payment date is five days after the date of record, on which the company will mail the dividend payment to the holders of record.
A)True
B)False
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Page 16
Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) Which of the following is true of credit scoring of suppliers?
A) It is frequently used in business because the scoring information is easy to obtain.
B) It is frequently used in business because scoring standards are too flexible.
C) It is frequently not used in business because most business transactions involve mercantile credit which cannot be scored.
D) It is frequently used in business because mercantile credit decisions are easily quantifiable.
Q2) Firms are able to reduce financing costs or increase the funds available for expansion by maximizing the amount of funds tied up in working capital.
A)True
B)False
Q3) In the EOQ model, if the size of order increases, the ________.
A) carrying cost will increase
B) order cost will remain unchanged
C) order cost will increase
D) storage cost will decrease
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17
Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Accruals and accounts payable are ________.
A) negotiated and secured sources of long-term financing
B) negotiated and unsecured sources of short-term financing
C) secured sources of short-term financing
D) spontaneous and unsecured sources of short-term financing
Q2) Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.
A)True
B)False
Q3) Pledges of accounts receivable are never made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.
A)True
B)False
Q4) Lines of credit are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) A firm needs $2 million of new long-term financing. The firm is considering the sale of common stock or a convertible bond. The current market price of the common stock is $42 per share. To sell this new issue, the stock would have to be underpriced by $2 and sold for $40 per share. The firm currently has 300,000 shares of common stock outstanding. The alternative is to issue 20-year, 10 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $50 per share, and the bond could be sold at par. The earnings for the firm are expected to be $500,000 in the coming year. Assuming the firm chooses the sale of common stock, the earnings per share in the coming year will be ________.
A) $1.43
B) $1.44
C) $1.45
D) $1.47
Q2) The exercise price or option price of a warrant is normally set ________.
A) below the book value of the firm's stock at the time of issuance
B) equal to the market price of the firm's stock at the time of issuance
C) above the market price of the firm's stock at the time of issuance
D) above the book value of the firm's stock at the time of issuance
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) The "stakeholders" in targeted takeover companies include the ________.
A) federal reserve bank
B) media
C) employees
D) state government
Q2) In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the firm's operating management and operates the firm until all claims have been settled.
A)True
B)False
Q3) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of liquid assets.
A)True
B)False
Q4) A creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for valuing a firm both in terms of its liquidation value and as a going concern.
A)True
B)False
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Page 20
Chapter 19: International Managerial Finance
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Sample Questions
Q1) The all-current-rate method dictated by the FASB No. 52 statement requires the translation of all balance sheet accounts at the ________ rate and all income statement items at the ________ rates.
A) closing; average
B) average; closing
C) historical; current
D) average; historical
Q2) The usual capital markets used by U.S.-based MNCs that desire international ownership of their equity are ________.
A) Western Europe and Japan
B) Mexico and Canada
C) Saudi Arabia and South Africa
D) Liechtenstein and Panama
Q3) NAFTA is an international financial market that provides for borrowing and lending currencies outside their country of origin.
A)True
B)False
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