Course Introduction
Financial Decision Making Practice
Exam
Financial Decision Making explores the principles and techniques used by organizations and individuals to make informed financial choices. The course covers topics such as budgeting, forecasting, investment analysis, risk assessment, capital structure, and the evaluation of financial alternatives. Emphasis is placed on using financial tools and data to solve real-world problems, understand the impact of financial decisions on business performance, and develop strategies for effective resource allocation. Through case studies and practical exercises, students gain the skills necessary to analyze complex financial situations and support sound decision-making processes.
Recommended Textbook Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Tim works for a large manufacturing company and is now in charge of all fixed asset purchases.In other words,Tim is in charge of:
A)capital structure management
B)asset allocation
C)risk management
D)capital budgeting
E)working capital management
Answer: D
Q2) Working capital management includes which of the following?
I.controlling the inventory level
II.determining when to pay suppliers
III.deciding how much long-term debt to assume
IV.controlling the amount of cash that is readily available
A)I and II only
B)I and IV only
C)II and III only
D)I,II and IV only
E)II,III and IV only
Answer: D
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Keyser Materials paid $7500 in dividends and $28 311 in interest over the past year while net working capital increased from $13 506 to $18 219.The company purchased $42 000 in net new fixed assets and had depreciation expenses of $16 805.During the year,the firm issued $25 000 in net new equity and paid off $11 000 in long-term debt.What is the amount of the cash flow from assets?
A)$21 811
B)$30 811
C)$36 189
D)$49 811
E)$71 811
Answer: A
Q2) The cash flow from assets can be defined as:
A)the cash available to distribute to the creditors and to the stockholders
B)the cash flow to creditors minus the cash flow to stockholders
C)the net income plus depreciation plus the interest expense
D)the net income minus the change in net working capital
E)the net income minus the net capital spending minus the change in net working capital
Answer: A
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Page 4
Chapter 3: Working With Financial Statements
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Q1) Which of the following statements identify problems with financial statement analysis?
I: It is not always easy to identify a suitable benchmark for comparison purposes.
II: As many firms are conglomerates owning more than one line of business it is sometimes difficult to identify groups of firms that are directly comparable.
III: Firms in the same industry operate globally and comparison may be difficult due to different accounting standards used in the preparation of financial statements.
IV: Unusual events may affect financial performance which may give misleading signals when comparing firms' results.
A)I only
B)I,II,III and IV
C)I,II and IV
D)I and III
E)III and IV
Answer: C
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Q1) Sixty years ago,your grandparents opened two savings accounts and deposited $200 in each account.The first account was with Which Bank at 3 per cent,compounded annually.The second account was with Dragon Bank at 3.5 per cent,compounded annually.Which one of the following statements is true concerning these accounts?
A)The Which Bank account is currently worth $1,201.54.
B)The Which Bank account has earned $211.19 more in interest than the Dragon Bank account.
C)The Dragon Bank account is currently worth $1,526.08.
D)The Dragon Bank account has paid $367.48 more in interest than the Which Bank account.
E)The Dragon Bank account has paid $397.30 more in interest than the Which Bank account.
Q2) The method of calculating interest once during the entire life of the loan,on the original sum borrowed,is known as:
A)simple interest
B)interest on interest
C)compounding
D)rule of 72
E)compound interest
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) You have been offered a chance to invest in a coffee plantation in North Queensland.The investment promises to pay $5000 at the end of year 3,$5000 at the end of year 4,$5000 at the end of year 6 and $10 000 at the end of year 10.If you believe that similar investments have a return of approximately 15% what is the highest amount you would be prepared to pay for this investment?
A)$25 000
B)$21 250
C)$10 780
D)$28 750
E)$6180
Q2) An investor wishes to accumulate $950 000 at the end of four-and-a-half years.How much does he need to deposit now,if the interest rate is 12% per annum,compounded monthly (to the nearest dollar)?
A)$555 098
B)$496 251
C)$570 843
D)$611 115
E)$437 000
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Bondi Beachwear Pty Ltd takes out a short term loan through Witch Bank using a bill of exchange.The face value of the bill is $100 000 and it will mature in 90 days.If the interest rate quoted by the bank is 7.00% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?
A)$93 803
B)$93 458
C)$92 889
D)$98 289
E)$98 303
Q2) A bond that pays no regular interest payments is called a(n)_____ bond.
A)income
B)convertible
C)exotic
D)put
E)zero coupon
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8
Chapter 7: Equity Markets and Stock Valuation
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Q1) An agent who arranges security transactions among investors is a called a:
A)specialist
B)dealer
C)member
D)floor trader
E)broker
Q2) Ordinary shareholders have all the following rights except:
A)the right to priority in the event of company liquidation
B)the right to share proportionally in dividends paid
C)the right to share proportionally in assets remaining after liabilities have been paid in a company liquidation
D)the right to vote on matters of great importance as set out in the constitution of the company
E)the right to elect directors
Q3) The stream of customer instructions to buy and sell securities is called the:
A)buyer's stream
B)market maker
C)order flow
D)operations flow
E)execution stream
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) The average net income of a project divided by the project's average book value is referred to as the project's:
A)required return
B)market rate of return
C)internal rate of return
D)average accounting return
E)discounted rate of return
Q2) Which one of the following best expresses two mutually exclusive investments?
A)constructing a theatre and a restaurant side by side
B)locating a restaurant inside a theatre building
C)building either a gas station or a restaurant on a corner lot
D)building both a restaurant and a parking lot on a vacant lot
E)building a parking lot for the benefit of both restaurant and theatre patrons
Q3) The net present value rule states that you should accept a project if the NPV:
A)is equal to zero or negative
B)exceeds the required rate
C)is less than 1.0
D)is positive
E)exceeds the initial cost
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Page 10
Chapter 9: Making Capital Investment Decisions
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Q1) Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
A)side effect
B)erosion
C)sunk cost
D)opportunity cost
E)marginal cost
Q2) Ignoring the option to wait:
A)may overestimate the internal rate of return on a project
B)may underestimate the net present value of a project
C)ignores the ability of a manager to increase output after a project has been implemented
D)is the same as ignoring all strategic options
E)ignores the value of discontinuing a project early
Q3) A pro forma financial statement is a financial statement that:
A)expresses all values as a percentage of either total assets or total sales
B)compares actual results to the budgeted amounts
C)compares the performance of a firm to its industry
D)projects future years' operations
E)values all assets based on their current market values
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Chapter 10: Some Lessons From Capital Market History
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Q1) Which one of the following had the lowest standard deviation of returns for the period of 1985-2009?
A)All Ordinaries Index
B)All Ordinaries Index and ten-year government bonds are the same
C)ten-year government bonds
D)30-day bank bills
E)30-day bank bills and ten-year government bonds are the same
Q2) One of the biggest Australian companies' stock returned 9.37%,-3.55% and 11.55% over the past three years,respectively.What is the arithmetic average return for this period?
A)8.16%
B)5.79%
C)8.68%
D)9.37%
E)4.46%
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12
Chapter 11: Risk and Return
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Sample Questions
Q1) The principle of diversification tells us that:
A)there is no risk in investing in a portfolio of shares
B)spreading your investment across many assets will eliminate some risk
C)all risk can be eliminated
D)unsystematic risk cannot be reduced
E)systematic risk can always be eliminated by diversification
Q2) Diversifiable risk is interchangeable with which term?
A)unsystematic risk
B)market risk premium
C)systematic risk
D)risk premium
E)market risk
Q3) The beta of a portfolio cannot be less than _____ and no more than _____:
A)0;1
B)the lowest individual beta in the portfolio;the highest individual beta in the portfolio
C)the lowest individual beta in the portfolio;1
D)0;the highest individual beta in the portfolio
E)1;2
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13
Chapter 12: Long-Term Financing
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Sample Questions
Q1) A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so,the firm:
A)automatically maximises the total value created for its shareholders
B)allocates capital funds evenly amongst its divisions
C)encourages the division managers to only recommend their most conservative projects
D)maintains the current risk level and capital structure of the firm
E)automatically gives preferential treatment in the allocation of funds to its riskiest division
Q2) Fancee Restaurant's cost of equity is 15.3 per cent and its after-tax cost of debt is 6.1 per cent.What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 per cent? Assume a classical tax system.
A)11.92 per cent
B)13.01 per cent
C)10.36 per cent
D)12.28 per cent
E)8.94 per cent
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Page 14
Chapter 13: Leverage and Capital Structure
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Q1) Kline Construction is an all-equity firm that has projected perpetual earnings before interest and taxes of $879 000.The current cost of equity is 18.3 per cent and the tax rate is 34 per cent.The company is in the process of issuing $6.2 million of 8.5 per cent annual coupon bonds at par.What is the levered value of the firm?
A)$5 278 164
B)$6 422 225
C)$7 385 695
D)$6 713 185
E)$5 541 085
Q2) Paying interest reduces the taxes owed by a firm.Which one of the following terms applies to this relationship?
A)financial risk
B)M&M Proposition I
C)interest tax shield
D)static theory of interest rates
E)homemade leverage
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15
Chapter 14: Dividends and Dividend Policy
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Q1) Ettalong Electric Ltd is preparing to pay its interim dividend of $2.20 a share this quarter.The shares closed at $57.70 a share today.What will the ex-dividend share price be if the estimated tax rate for shareholders is 10 per cent and all else is held constant?
A)$55.50
B)$55.94
C)$55.99
D)$55.28
E)$55.72
Q2) Centropen Inc.has 460 000 shares outstanding and the total market value of the equity is $1 610 000.The firm has just announced a repurchase of $420 000 worth of shares.After the repurchase,Centropen will have ____ shares outstanding at a market price of ____ per share.
A)320 000;$3.40
B)280 000;$2.82
C)340 000;$3.50
D)301 000;$3.10
E)250 000;$2.59
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) If an offer of issued securities is made only to institutional investors,such as life insurance offices and superannuation funds,the method is called:
A)private placement
B)subordinated debt
C)public issue
D)matching principle
E)family issue
Q2) Northern Importers wants to raise $58 million to expand its operations into South America.The company will sell new shares in a general cash offering.The underwriters charge a 7.8 per cent fee,the administrative costs are $411 000,and the offer price is $36 per share.How many shares must be sold if the firm is to raise the funds it desires?
A)1 759 792 shares
B)1 648 315 shares
C)1 811 502 shares
D)2 051 515 shares
E)1 989 415 shares
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Chapter 16: Short-Term Financial Planning
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Q1) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A)inventory period
B)operating cycle
C)cash cycle
D)accounts payable period
E)accounts receivable period
Q2) Which one of the following defines the cash cycle?
A)operating cycle minus the inventory period
B)operating cycle minus the accounts receivable period
C)inventory period plus the accounts receivable period
D)operating cycle minus the accounts payable period
E)inventory period plus the accounts payable period
Q3) Which type of financing is generally used by new car dealers to finance their inventories?
A)trade credit financing
B)blanket inventory lien arrangement
C)committed line of credit
D)bailment financing
E)field warehousing financing
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Chapter 17: Working Capital Management
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Q1) Which one of the following terms refers to the basic factors that are reviewed when evaluating the creditworthiness of a potential customer?
A)terms of sale
B)collection policy
C)credit score
D)five Cs of credit
E)cash concentration
Q2) Which one of the following 5Cs refers to the general economic climate in a customer's line of business?
A)capital
B)collateral
C)character
D)capacity
E)conditions
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Chapter 18: International Aspects of Financial Management
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Q1) The concept that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:
A)exchange rate equilibrium
B)exchange rate parity
C)interest rate equilibrium
D)foreign equalisation
E)interest rate parity
Q2) Which one of the following terms is defined as having international operations in a world where relative currency values change?
A)exchange rate risk
B)absolute purchasing power parity
C)political risk
D)relative purchasing power parity
E)interest rate parity
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