Financial Decision Making Practice
Exam
Course Introduction
Financial Decision Making provides students with a comprehensive understanding of the tools and frameworks essential for making sound financial choices in both personal and organizational contexts. The course covers core concepts such as time value of money, risk and return analysis, capital budgeting, financial statement analysis, and the principles of investment decision-making. Through case studies and real-world applications, students learn to evaluate financial options, assess investment opportunities, analyze costs and benefits, and formulate strategies that enhance value for stakeholders. This course equips learners with the skills needed to interpret financial data and make informed decisions that align with organizational objectives.
Recommended Textbook
M Finance 4th Edition by Marcia Cornett
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14 Chapters
1727 Verified Questions
1727 Flashcards
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which of the following statements is incorrect?
A) Sole proprietorships are subject to less regulation.
B) Both angel investors and venture capitalists exchange capital for ownership.
C) Shareholders are responsible for paying off the corporate bonds in the event of a bankruptcy.
D) All of these choices are correct.
Answer: C
Q2) A metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community.
A) agency theory
B) angel investor
C) invisible hand
D) perks or perquisites
Answer: C
Q3) Which of the following will help you make better personal financial decisions?
A) knowing finance theory
B) applying financial tools
C) auditors
D) knowing finance theory and applying financial tools.
Answer: D
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Nickolas's Nut Farms,Inc.has net cash flows from operating activities for the last year of $25 million.The income statement shows that net income is $15 million and depreciation expense is $6 million.During the year,the change in inventory on the balance sheet was a decrease of $4 million,change in accrued wages and taxes was a decrease of $1 million and change in accounts payable was a decrease of $1 million.At the beginning of the year the balance of accounts receivable was $5 million.What was the end of year balance for accounts receivable?
A) $2 million
B) $3 million
C) $7 million
D) $9 million
Answer: B
Q2) Common stockholders' calculating equity divided by number of shares of common stock outstanding is the formula for
A) earnings per share (EPS).
B) dividends per share (DPS).
C) book value per share (BVPS).
D) market value per share (MVPS).
Answer: C
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Page 4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Which of the following statements is true about return on equity (ROE)?
A) It measures the return on common stockholders' investment in the assets of the firm.
B) The value of the firm's ROE is affected by net income.
C) The value of the firm's ROE is affected by the amount of financial leverage or debt that the firm uses.
D) All of these choices are correct.
Answer: D
Q2) Calculate the times interest earned ratio for Tierre's Ts,Inc.using the following information.Sales = $200,000,cost of goods sold = $50,000,depreciation expense = $13,000,addition to retained earnings = $70,000,dividends per share = $0.50,tax rate = 30 percent,and number of shares of common stock outstanding = 1,000.Tierre's Ts has no preferred stock outstanding.
A) 0.1814
B) 0.4854
C) 0.685
D) 3.7756
Answer: D
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Page 5
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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153 Flashcards
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Sample Questions
Q1) Which is more valuable,receiving $1,000 today or receiving $1,200 in 3 years if interest rates are 7 percent?
A) receiving $1,000 today
B) receiving $1,200 in 3 years
C) They are worth the same amount.
D) need more information to make a determination
Q2) Approximately how many years does it take to double a $475 investment when interest rates are 8 percent per year?
A) 18 years
B) 12 years
C) 9 years
D) 4.75 years
Q3) A firm's net income last year was $2.65 million.Its net income grew 8 percent during the last "5" years.If that growth rate continues,how long will it take for the firm's net income to double?
A) 6.6 years
B) 7.1 years
C) 8.2 years
D) 9 years
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
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Sample Questions
Q1) Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment.If you get a 15-year mortgage with a 6 percent interest rate,what are the monthly payments?
A) $997.28
B) $1,072.51
C) $1,139.21
D) $1,238.93
Q2) Due to poor spending habits,Ricky has accumulated $5,000 in credit card debt.He has missed several payments and now the annual interest rate on the card is 16.75 percent! If he pays $200 per month on the card,in total,how much interest expense does Ricky pay to the credit card company?
A) $847.50
B) $1,192.00
C) $2,118.75
D) $6,192.00
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) All of the following are common shapes for the yield curve EXCEPT
A) elliptical.
B) upward-sloping.
C) flat.
D) inverted.
Q2) Why would foreign participants borrow from U.S.financial markets?
A) They look for the cheapest source of funds.
B) They look at the economic conditions of their home country.
C) All of these choices are correct.
Q3) Which of the following is NOT a capital market instrument?
A) U.S. Treasury notes and bonds
B) U.S. Treasury bills
C) U.S. government agency bonds
D) corporate stocks and bonds
Q4) All of the following are secondary market transactions EXCEPT
A) GE sells $30 million of new preferred stock.
B) Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio.
C) The Magellan Fund buys $100 million of Apple previously issued bonds.
D) Allstate Insurance Co. sells $5 million in IBM bonds.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)
A) $90.29
B) $195.62
C) $1,195.62
D) $995.62
Q2) Investment grade bonds include those bonds with ratings:
A) from AAA to BB.
B) from AAA to BBB.
C) from AAA to B.
D) from AAA to A.
Q3) A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield.Which bond will give the client more profit after taxes?
A) The municipal bond.
B) The corporate bond.
C) Both give the client equal profits after taxes.
D) There is not enough information given to determine the answer.
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Chapter 8: Valuing Stocks
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Sample Questions
Q1) If on November 26,2017,The Dow Jones Industrial Average closed at 12,743.40,which was down 237.44 that day.What was the return (in percent)of the stock market that day?
A) 0.02 percent
B) +0.02 percent
C) 1.83 percent
D) +1.83 percent
Q2) Value stocks are:
A) stocks that are expected to exhibit high growth.
B) stocks that have low P/E ratios and are selling at a bargain price.
C) stocks that have high valuation ratios, such as P/E.
D) none of the options.
Q3) A firm does not pay a dividend.It is expected to pay its first dividend of $0.10 per share in two years.This dividend will grow at 11 percent indefinitely.Using a 13 percent discount rate,compute the value of this stock.
A) $4.42
B) $4.59
C) $5.43
D) $7.21
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Which of the following statements is correct regarding total risk?
A) The coefficient of variation is a measure of the firm's total risk.
B) All firms have the same amount of total risk because they are all exposed to the same market risk.
C) Conglomerates will have less total risk than a firm that has one line of business.
D) None of the statements are correct.
Q2) Compute the standard deviation of Kohl's monthly returns.The past five monthly returns for Kohl's are 5.55 percent,8.62 percent, 4.44 percent, 1.52 percent,and 9.75 percent.
A) 4.92 percent
B) 5.07 percent
C) 6.28 percent
D) 6.12 percent
Q3) Which of these is a measure of risk to reward earned by an investment over a specific period of time?
A) Coefficient of variation
B) Market deviation
C) Standard deviation
D) Total variation
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Page 11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) The annual return on the S&P 500 Index was 12.4 percent.The annual T-bill yield during the same period was 5.7 percent.What was the market risk premium during that year?
A) 5.7 percent
B) 6.7 percent
C) 12.4 percent
D) 18.1 percent
Q2) Stock A has a required return of 19 percent.Stock B has a required return of 11 percent.Assume a risk-free rate of 4.75 percent.Which of the following is a correct statement about the two stocks?
A) Stock A is riskier.
B) Stock B is riskier.
C) The stocks have the same risk.
D) We would need to know if the markets are efficient to answer this question.
Q3) The study of the cognitive processes and biases associated with making financial and economic decisions is known as
A) asset pricing model.
B) behavioral finance.
C) efficient market hypothesis.
D) stock market bubble.
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Oberon Inc.has a $20 million ($1,000 face value)10-year bond issue selling for 99 percent of par that pays an annual coupon of 7.25 percent.What would be Oberon's before-tax component cost of debt?
A) 6.12 percent
B) 7.02 percent
C) 7.40 percent
D) 8.15 percent
Q2) A firm uses only debt and equity in its capital structure.The firm's weight of debt is 40 percent.The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 30 percent.If the firm's WACC is 11 percent,what is the firm's cost of equity?
A) 15.92 percent
B) 14.13 percent
C) 15.03 percent
D) 15.68 percent
Q3) Which of the following will increase the cost of equity?
A) The firm's share price falls 10 percent.
B) The firm is expected to reduce its dividend.
C) The firm's corporate tax rate increases.
D) None of the options are correct.
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) You are evaluating a project for your company.You estimate the sales price to be $500 per unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and 1500 units in year 3.The project has a three-year life.Variable costs amount to $300 per unit and fixed costs are $200,000 per year.The project requires an initial investment of $325,000 in assets that will be depreciated straight-line to zero over the three-year project life.The actual market value of these assets at the end of year 3 is expected to be $50,000.NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year.The tax rate is 34 percent and the required return on the project is 12 percent.What is the operating cash flow for the project in year 2?
A) $74,167
B) $192,500
C) $300,833
D) $374,500
Q2) A decrease in net working capital (NWC)is treated as a:
A) cash inflow.
B) cash outflow.
C) sunk cost.
D) historical cost.
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Chapter 13: Weighing Net Present Value and Other Capital Budgeting Criteria
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Sample Questions
Q1) Which of the following is incorrect regarding the IRR statistic?
A) For independent projects, IRR will give the same accept/reject decision as NPV.
B) For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
C) To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero.
D) None of the statements are incorrect.
Q2) A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as: A) IRR.
B) EAR.
C) NPV.
D) MIRR.
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15
Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) To trace cash flows through the firm's operations,we must measure which of the following? (It is the time necessary to acquire raw materials,turn them into finished goods,sell them,and receive payment for them.)
A) Cash cycle
B) Operating cycle
C) Transaction cycle
D) Production cycle
Q2) Everything else held constant,will an increase in the amount of inventory on hand increase or decrease the firm's profitability?
A) Decrease the profitability.
B) Increase the profitability.
C) It could either increase or decrease the profitability depending on net profit margins.
D) It could either increase or decrease the profitability depending on the debt ratio.
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