Financial Decision Making
Mock Exam
Course Introduction
Financial Decision Making introduces students to the fundamental concepts and analytical tools necessary for making informed business and personal financial decisions. The course covers topics such as financial statement analysis, capital budgeting, risk assessment, valuation techniques, and the principles of investment and financing decisions. Emphasis is placed on the practical application of financial theories for evaluating alternatives, solving real-world problems, and maximizing value for stakeholders. Through case studies and problem-solving exercises, students develop critical skills for interpreting financial data and making strategic decisions in both corporate and individual contexts.
Recommended Textbook Fundamentals of Corporate Finance 6th 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) One corporate activity that is specifically reserved for the board of directors is the:
A) declaration of dividends.
B) custody of records.
C) preparation of budgets.
D) day-to-day operation of the firm.
Answer: A
Q2) Long-term financing arrangements occur in the: A) money markets.
B) capital markets.
C) secondary markets.
D) primary markets.
Answer: B
Q3) In a large corporation,budget preparation would most likely be conducted by the: A) treasurer.
B) controller.
C) chief financial officer.
D) financial manager.
Answer: B
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Chapter 2: Financial Markets and Institutions
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Q1) Financing for public corporations must flow through financial markets.
A)True
B)False
Answer: False
Q2) Describe what a mutual fund is.
Answer: A managed investment fund,pooling the savings of many investors and investing in a portfolio of securities.
Q3) You can buy silver in the:
A) capital markets.
B) foreign exchange markets.
C) commodities markets.
D) option markets.
Answer: C
Q4) A bond differs from a share of stock in that a bond:
A) represents a claim on the firm.
B) has more risk.
C) has guaranteed dividend payments.
D) has a maturity date.
Answer: D
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Chapter 3: Accounting and Finance
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Q1) Professor Diehard found an effective antibiotic for the DEPRESS bacteria,and patented the drug.He believes that he can sell the patent for $20 million.He then formed a corporation and invested $400,000 in setting up a production plant.There are 2 million shares of stock outstanding.If the professor's belief is correct,what would be the price per share and the book value per share?
A) $10.20; $.20
B) $10.00; $.20
C) $9.80; $.40
D) $9.80; $.20
Answer: A
Q2) Accounting practices are currently standardized across all countries.
A)True
B)False
Answer: False
Q3) If market values of equity exceed book values of equity,then:
A) equity has been depreciated too rapidly.
B) the firm uses accrual-based accounting.
C) profit potential is expected to be attractive relative to the level of risk.
D) the firm is holding too much cash.
Answer: C
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Chapter 4: Measuring Corporate Performance
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Q1) The use of debt in the firm's capital structure will increase ROE if the firm:
A) has more debt than equity.
B) pays less in taxes than in interest.
C) earns a higher return than the rate paid on debt.
D) has a times interest earned ratio greater than 1.0.
Q2) After-tax operating income for a leveraged firm is defined as:
A) net income + after-tax interest.
B) EBIT × (1 - tax rate) + after-tax interest
C) net income + depreciation.
D) profit margin × sales.
Q3) Which one of these ratios is commonly referred to as the acid-test ratio?
A) times interest earned ratio.
B) quick ratio.
C) cash coverage ratio.
D) cash ratio.
Q4) High levels of liquidity are most apt to indicate:
A) low levels of net working capital.
B) low profit margins.
C) high levels of economic value added.
D) inefficient use of assets.
Page 6
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Chapter 5: The Time Value of Money
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Q1) Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000,$35,000,and $42,000 over the next three years with the first payment of $28,000 occurring one year from today.What is this contract worth today at a discount rate of 7.25%?
A) $88,311.08
B) $89,423.91
C) $90,580.55
D) $91,341.41
Q2) Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually,and the first payment occurs one year from now?
A) $1,067,477.62
B) $1,128,433.33
C) $1,487,320.09
D) $1,250,000.00
Q3) The Excel function for present value is PV (rate,nper,pmt,FV).
A)True
B)False
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Chapter 6: Valuing Bonds
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Q1) If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90,how much will it be worth 1 year from now if interest rates are constant?
A) $904.90
B) $925.39
C) $947.93
D) $1,000.00
Q2) How does a bond dealer generate profits when trading bonds?
A) by maintaining bid prices lower than ask prices
B) by maintaining bid prices higher than ask prices
C) by retaining the bond's next coupon payment
D) by lowering the bond's coupon rate upon resale
Q3) If you purchase a 5-year,zero-coupon bond for $691.72,how much could it be sold for 3 years later if interest rates have remained stable?
A) $848.12
B) $923.50
C) $862.92
D) $911.15
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Chapter 7: Valuing Stocks
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Q1) In a valuation of a non-constant dividend growth stock,the terminal value represents the:
A) point at which the present value of future dividends equals zero.
B) maturity date of the stock.
C) present value of future dividends from that point onwards.
D) highest value that the stock will attain.
Q2) Explain why the market value of common stock often differs from its liquidation value or its book value.
Q3) How can you reconcile the fact that whether an investor favours dividends or capital gains,the investor should accept the dividend discount model as a determination of share value?
Q4) Which of the following is a characteristic of secondary markets for common stock?
A) only low-priced shares are traded in these markets.
B) only high-risk shares are traded in these markets.
C) secondary markets are where corporations borrow funds.
D) secondary-market trades do not provide funds for corporations whose stock is traded.
Q5) How does competition among investors lead to efficient markets?
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Page 9
Chapter 8: Net Present Value and Other Investment Criteria
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Q1) A project with an IRR that is less than the opportunity cost of capital should be:
A) accepted for all project types.
B) accepted for all lending projects.
C) accepted for all borrowing projects.
D) rejected for all projects.
Q2) Soft capital rationing is imposed upon a firm from _____ sources,while hard capital rationing is imposed from _____ sources.
A) Internal; external
B) Internal; internal
C) External; internal
D) External; external
Q3) A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?
A) select the project with the higher profitability index.
B) select the project with the lower profitability index.
C) without capital rationing, both projects can be selected.
D) without capital rationing, select by NPV method.
Q4) Discuss three reasons why a firm may want to impose soft capital rationing.
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Page 10
Chapter 9: Using Discounted Cash Flow Analysis to Make Investment Decisions
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Q1) When the real rate of interest is less than the nominal rate of interest,then:
A) inflation must be added to the nominal rate.
B) investment returns do not increase purchasing power.
C) nominal flows should be discounted with real rates.
D) inflation is expected to occur.
Q2) Capital budgeting projects typically assume that all cash flows transpire at the end of the year.The reason for this is that:
A) less tax liability results from this practice.
B) balance sheets are prepared at the end of the year.
C) it is easier for the analyst in this manner.
D) most corporations collect their cash at the end of the year.
Q3) Firms favour assets with high CCA rates because:
A) they have longer economic lives.
B) it reduces the total amount of taxes paid over the project's life.
C) they increase net accounting profits over the project's life.
D) their choice impacts project net present value favourably.
Q4) It is easy to imagine that a financial manager would be reluctant to abandon a project in which large sums of money have been invested with no cash return.Discuss the important concept here that should be the manager's guiding policy.
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Chapter 10: Project Analysis
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Q1) What-if analysis can help identify the inputs that are most worth refining before you commit to a project.
A)True
B)False
Q2) Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?
A) the decision should be "yes" whenever the amount of possible profit exceeds the amount of possible loss.
B) the decision should be "no" whenever there is a possibility of loss.
C) the expected value is positive before discounting.
D) the expected value is negative before discounting.
Q3) The accounting break-even point is that level of sales where:
A) sales revenue equals variable costs.
B) sales revenue equals variable plus fixed costs.
C) EBIT equals depreciation expense, and, thus cash flow equals zero.
D) EBIT equals zero.
Q4) What are two of the factors that will commonly affect the abandonment value of a project? What criterion should determine abandonment?
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Q1) Which of the following would you expect to represent the broadest-based index of Canadian stocks?
A) TSX 300
B) CDNX
C) Standard and Poor's Composite
D) Financial Times Index
Q2) Systematic risk is faced by all common stock investors.
A)True
B)False
Q3) The incremental risk to a portfolio from adding another stock:
A) is always greater than the average portfolio risk.
B) is always less than the average portfolio risk.
C) is always positive.
D) is often positive but can be negative.
Q4) The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:
A) the variance of treasury bill returns is zero.
B) the standard deviation of treasury bill returns is negative.
C) the real return on treasury bills has been zero.
D) common stocks should offer a higher return than treasury bills.
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Chapter 12: Risk, Return, and Capital Budgeting
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Q1) Based on the following information,make an estimate of the stock's Beta: Month 1 = Stock +1.5%,Market +1.1%; Month 2 = Stock +2.0%,Market +1.4%; Month 3 = Stock -2.5%,Market -2.0%.
A) Beta is greater than 1.0
B) Beta is less than 1.0
C) Beta equals 1.0
D) there is no consistent pattern of returns.
Q2) A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:
A) high Beta of the stock.
B) unique risk of the stock.
C) changes in market risk premium over time.
D) current underpricing of the stock.
Q3) A major benefit of investing in mutual funds is:
A) reducing the Beta of the investment portfolio.
B) increasing the Beta of the investment portfolio.
C) low cost reduction of exposure to unique risks.
D) the elimination of market risk.
Q4) How can a manager calculate the opportunity cost of capital for a project?
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) What is the WACC for a firm with 50% debt and 50% equity that pays 12% on its debt,20% on its equity,and has a 40% tax rate?
A) 9.6%
B) 12.0%
C) 13.6%
D) 16.0%
Q2) What decision should be made on a project of above-average risk if the project's IRR exceeds the WACC?
A) accept the project; NPV is positive.
B) reject the project; NPV is negative.
C) decide after discounting at the IRR.
D) decide after discounting at an appropriate rate.
Q3) Which of the following should be expected to occur when a firm significantly increases its proportion of debt financing?
A) the required return on debt will decrease.
B) the required return on equity will decrease.
C) the company cost of capital will increase.
D) the company cost of capital will remain unchanged.
Q4) 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) One way that investors contribute capital to the firm is by:
A) plowing back money into retained earnings.
B) paying less than par value for the stock.
C) receiving dividends and reinvesting them on their own.
D) increasing the amount of treasury stock.
Q2) Which of the following are bonds whose coupon rate is tied to a price index?
A) pay-in-kind bonds
B) indexed bonds
C) reverse floaters
D) asset-backed bonds
Q3) The price at which new shares are issued is referred to as the par value of the stock.
A)True
B)False
Q4) Callable bonds may be repurchased by the issuing firm before maturity at the specified call price.
A)True
B)False
Q5) What conflicts of interest can arise between managers and stockholders?
Q6) Outline the impact of Bill C198
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Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Q1) If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share,the spread per share is:
A) $1.00.
B) $2.00.
C) $38.00.
D) $40.00.
Q2) Private placement of securities involves:
A) selling only to the firm's current investors.
B) non-disclosure of the issuing firm's name until after the sale.
C) the exchange of convertible bonds for equity.
D) non-public sale of securities to a limited number of investors.
Q3) Money that is offered to finance a new business is known as:
A) a general cash offer.
B) venture capital.
C) private placement.
D) a rights issue.
Q4) One advantage to private placements is the low cost associated with its issue.
A)True
B)False
Q5) What is the total amount of new money raised?
Page 17
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Chapter 16: Debt and Payout Policy
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Q1) What is the maximum rate that can be paid on debt and maintain a 14% WACC with a 19% expected return on equity in a firm with a 60% debt-to-asset ratio? Ignore taxes.
A) 6.50%
B) 9.90%
C) 10.67%
D) 11.14%
Q2) MM's proposition II states that the:
A) expected return on equity increases as financial leverage increases.
B) expected return on assets decreases as expected return on debt decreases.
C) firm's capital structure is irrelevant to value determination.
D) greater the proportion of equity, the higher the expected return on debt.
Q3) Proposition II of MM states that the expected return on assets increases as the debt-equity ratio increases.
A)True
B)False
Q4) The benefit of an interest tax shield is captured by the equity holders.
A)True
B)False
Q5) Calculate the required return on the company stock.
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Chapter 17: Leasing
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Q1) Which one of the following is a valid statement about leasing in Canada?
A) less than 5% of machinery and equipment in Canada is leased.
B) lessors prefer to keep equipment at the end of a lease in order to lease it again.
C) lessees typically purchase the asset at the end of the lease.
D) operating leases are particularly useful in the long term.
Q2) If a lessee has a zero tax rate,he faces no advantage of leasing over buying,since he gets no tax shelter in either case.
A)True
B)False
Q3) When deciding whether or not to lease an asset,the _____________ should be compared against the ______________,and if the first is lower then the company should proceed with the lease.
A) internal rate of return; cost of debt
B) WACC; cost of debt
C) cost of debt; internal rate of return
D) return on equity; WACC
Q4) Describe three major differences between operating and financial leases,pointing out how these differences reflect varying lessor and lessee situations.
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Page 19
Chapter 18: Payout Policy
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Q1) In regards to dividend policy,unless a firm's investment policy and borrowing remain constant:
A) its overall cash flows will remain the same.
B) its overall cash flows will change.
C) shareholders' risk will increase.
D) shareholders' risk will decrease.
Q2) Board of directors may be legally restricted in their declaration of dividends if:
A) the cash must be borrowed for the dividend payment.
B) dividends have increased substantially over a short period of time.
C) the dividend would create a situation of insolvency.
D) the stock is selling at a low relative price.
Q3) Why may a large increase in earnings not translate into a large increase in dividends?
A) the earnings will be taxed.
B) some investors may prefer capital gains.
C) managers wish to assess the earning's persistence.
D) the earnings may already be a part of retained earnings.
Q4) How are dividends paid and how do companies decide on dividend payments?
Q5) Discuss the concept of dividend "smoothing."
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Chapter 19: Long-Term Financial Planning
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Q1) If the projected growth rate is smaller than the firm's sustainable growth rate:
A) It should increase its projected growth rate
B) The firm will be required to decrease its plowback ratio
C) Its debt-equity ratio will decrease
D) The firm will be required to increase borrowing
Q2) A firm's required external financing is determined by the:
A) Firm's projected growth rate
B) Sustainable growth rate
C) Plowback ratio
D) Amount of external financing available
Q3) Dividend policy is determined by all of the following except:
A) The debt-equity ratio
B) The need for funds
C) Forecasting
D) As a consequence of other planning decisions
Q4) To avoid inconsistency,financial planners should be sure to:
A) Draw information from many resources
B) Do all forecasting themselves
C) Produce perfectly accurate forecasts
D) Use forecasts based on common macroeconomic assumptions
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Chapter 20: Short-Term Financial Planning
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Q1) Which of the following would not be included in a cash budget?
A) income tax payments
B) cash receipts
C) dividend payments
D) depreciation
Q2) What was the sales volume in the current quarter if beginning accounts receivable,at $5,000,was $1,000 higher than ending,and $20,000 was collected?
A) $19,000
B) $20,000
C) $21,000
D) $24,000
Q3) Once the firm has sold its receivables,the non-recourse factors bear all the responsibility for collecting on the account.
A)True
B)False
Q4) Company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.
A)True
B)False
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Chapter 21: Cash and Inventory Management
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Q1) 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?
Q2) 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
Q3) A manager estimates that her firm benefits from an average float time of six days.Which of the following is true if the firm averages $15,000 per day in payments?
A) the firm is losing interest on $90,000 per year
B) the firm's ledger balance averages $90,000 more than the bank's ledger balance
C) the firm has $45,000 in net float
D) the available balance at the bank is $90,000 greater than shown on the firm's books
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23
Chapter 22: Credit Management and Collection
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Q1) A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.
A)True
B)False
Q2) In general,a firm's credit policy should grant the credit whenever the expected:
A) Loss from default is less than the cost of the product.
B) Profit from granting credit exceeds zero.
C) Profit exceeds the price of the product.
D) Probability of a loss is less than 50%.
Q3) Bond ratings are an inexpensive source of credit information on publicly traded companies.
A)True
B)False
Q4) Extending trade credit can increase the probability of repeat orders.
A)True
B)False
Q5) Commercial drafts are issued by a customer's bank.
A)True
B)False
Q6) List three factors that affect a company's desired minimum cash balance.
Page 24
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Chapter 23: Mergers, Acquisitions, and Corporate Control
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Q1) Which of the following is correct concerning a spin-off?
A) A division of a firm is reconstituted as a new firm
B) An unprofitable division is divested
C) A division of a firm is bought by its managers
D) The spin-off generates no free cash flow
Q2) When shareholders are issued rights to buy shares if a bidder acquires a large stake in the firm is best defined as:
A) Leveraged Buyout.
B) Poison Pill.
C) Shark Repellent.
D) Proxy Contest.
Q3) If an automobile manufacturer were to acquire one of the firms listed in the answer options,which acquisition would be called a horizontal merger?
A) A steel mill
B) A rival manufacturer
C) A tire producer
D) A bank
Q4) Discuss how tactics such as shark repellents or poison pills accomplish their intent.
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Chapter 24: International Financial Management
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Q1) The international Fisher effect is valid in the long run,because: A) inflation rates are equal in different countries.
B) investors will move their money into countries with high real interest rates.
C) investors will move their money into countries with high nominal interest rates.
D) investors will move their money into countries with low inflation.
Q2) Would you be willing to exchange Dollars for pounds at a rate of $2.40(Canadian)/£ to invest in London and earn a one-year rate of 10%,as opposed to investing in Canada for a 5% return? What things might you first consider before investing?
Q3) If the spot exchange rate between Euro and Dollars is E26/$(Canadian)and the forward exchange rate is 25.5/$,what would you predict to be the expected future spot rate? Is the lira appreciating or depreciating against the Dollar?
Q4) Explain the interest rate parity theory.
Q5) If real interest rates are different across countries,investors will shift their money into countries with high real interest rates.
A)True
B)False
Q6) Explain the expectations theory of exchange rates.
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Page 26
Chapter 25: Options
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Q1) What is the primary difference between an American and European option?
A) The value at which the option can be exercised.
B) The number of options that can be exercised.
C) The time period when the option can be exercised.
D) The manner options are bought or sold.
Q2) Which is the best definition of a call option?
A) The right to buy an asset at a fixed price during a particular time period.
B) The right to sell an asset at a fixed price during a particular time period.
C) A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time.
D) The act of buying or selling the underlying asset via the option contract.
Q3) Of the following four put options that can be purchased on a stock,which would you expect to have the highest price?
A) September put; $65 exercise price
B) September put; $75 exercise price
C) December put; $65 exercise price
D) December put; $75 exercise price
Q4) What options may be provided in financial securities?
Q5) How,in general,is value derived from options on real assets?
Q6) What options may be provided in financial securities?
Page 27
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Chapter 26: Risk Management
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Q1) Which of the following is not correct concerning futures contracts?
A) Entails an obligation rather than an option.
B) Contract price is set at the beginning of the contract.
C) Contracts are exchange-traded.
D) Gains or losses are recorded at contract expiration.
Q2) The derivatives market is characterized by:
A) stability.
B) innovation.
C) riskiness.
D) private deals.
Q3) A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.
A) Decrease
B) Increase
C) Remain constant
D) Guarantee high profits
Q4) Unlike options,a futures contract binds the buyer to buy the commodity at a fixed price.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 28