Financial Decision Making
Question Bank
Course Introduction
Financial Decision Making provides students with a comprehensive understanding of the fundamental principles and analytical tools used in making financial choices within organizations. The course covers essential topics such as financial statement analysis, risk assessment, capital budgeting, investment evaluation, and the impact of financial markets on decision-making processes. Emphasis is placed on the application of quantitative techniques, critical thinking, and ethical considerations to real-world financial scenarios. By the end of the course, students will be equipped to make informed financial decisions that align with organizational goals and optimize value creation.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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1174 Verified Questions
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Sole proprietorships are predominantly started because:
A)they are easily and cheaply setup.
B)the proprietorship life is limited to the business owner's life.
C)all business taxes are paid as individual tax.
D)All of the above.
E)None of the above.
Answer: D
Q2) The articles of incorporation:
A)can be used to remove company management.
B)are amended annually by the company stockholders.
C)set forth the number of shares of stock that can be issued.
D)set forth the rules by which the corporation regulates its existence.
E)can set forth the conditions under which the firm can avoid double taxation.
Answer: C
Q3) What should be the goal of the financial manager of a corporation? Why?
Answer: The correct goal is to maximize the current value of the outstanding stock.This goal focuses on enhancing the returns to stockholders who are the owners of the firm.Other goals,such as maximizing earnings,focus too narrowly on accounting income and ignore the importance of market values in managerial finance.
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Page 3
Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) An increase in which one of the following will cause the operating cash flow to increase?
A)depreciation
B)changes in the amount of net fixed capital
C)net working capital
D)taxes
E)costs
Answer: A
Q2) The financial statement showing a firm's accounting value on a particular date is the:
A)income statement.
B)balance sheet.
C)statement of cash flows.
D)tax reconciliation statement.
E)shareholders' equity sheet.
Answer: B
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) When examining the EBITDA ratio,lower numbers are:
A)considered good.
B)considered mediocre.
C)considered poor.
D)indifferent to higher numbers.
E)it is impossible to garner information from this ratio.
Answer: A
Q2) A firm's sustainable growth rate in sales directly depends on its:
A)debt to equity ratio.
B)profit margin.
C)dividend policy.
D)asset efficiency.
E)All of the above.
Answer: E
Q3) Which is a more meaningful measure of profitability for a firm,return on assets or return on equity? Why?
Answer: Most would argue ROE since it measures returns relative to the amount of money shareholders have invested in the firm.In addition,since shareholder wealth maximization is a firm's primary goal,it makes more sense to look at this measure.
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Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A situation in which accepting one investment prevents the acceptance of another investment is called the:
A)net present value profile.
B)operational ambiguity decision.
C)mutually exclusive investment decision.
D)issues of scale problem.
E)multiple choices of operations decision.
Q2) Payback is frequently used to analyze independent projects because:
A)it considers the time value of money.
B)all relevant cash flows are included in the analysis.
C)it is easy and quick to calculate.
D)it is the most desirable of all the available analytical methods from a financial perspective.
E)it produces better decisions than those made using either NPV or IRR.
Q3) All else equal,the payback period for a project will decrease whenever the:
A)initial cost increases.
B)required return for a project increases.
C)assigned discount rate decreases.
D)cash inflows are moved earlier in time.
E)duration of a project is lengthened.
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) A zero coupon bond:
A)is sold at a large premium.
B)has a price equal to the future value of the face amount given a specified rate of return.
C)can only be issued by the U.S.Treasury.
D)has less interest rate risk than a comparable coupon bond.
E)has implicit interest which is calculated by amortizing the loan.
Q2) The Lo Sun Corporation offers a 8% bond with a current market price of $875.05.The yield to maturity is 9.18%.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?
A)40 years
B)52 years
C)60 years
D)65 years
E)80 years
Q3) The discussion of asset pricing in the text suggests that an investor will be indifferent between two bonds which have equal yields to maturity as long as they have equivalent default risk.Can you think of any real-world factors which might make a given investor prefer one of these bonds over the other?
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Page 7
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) What securities have offered the highest average annual returns over the last several decades? Can we conclude that return and risk are related in real life?
Q2) You purchased 200 shares of stock at a price of $36.72 per share.Over the last year,you have received total dividend income of $322.What is the dividend yield?
A)3.2%
Q3) You earned a total return of -5% on NoDotCom this year,earned -40% last year,and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.
Q4) Over the period of 1926 to 2012,the average rate of inflation was _____%.
A)2.0
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Page 8
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) A stock with a beta of zero would be expected to have a rate of return equal to:
A)the risk-free rate.
B)the market rate.
C)the prime rate.
D)the average AAA bond.
E)None of the above.
Q2) A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security Two.Security One has a standard deviation of 6%.Security Two has a standard deviation of 12%.The securities have a coefficient of correlation of 0.5.Which of the following values is closest to portfolio variance?
A).0027
B).0063
C).0095
D).0104
E)One must have covariance to calculate expected value.
Q3) A portfolio is made up of 75% of stock 1,and 25% of stock 2.Stock 1 has a variance of .08,and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.
Q4) Explain in words what beta is and why it is important.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) The Fama-French three factor model includes the following factors:
A)beta,expected return on the market,risk free rate of interest,a size factor,and a value factor.
B)the market risk premium,a volume factor,and a size factor.
C)beta,expected return on the market,risk free rate of interest,a volume factor,and a value factor.
D)the yield on corporate bonds,a size factor,and a market factor.
E)None of the above.
Q2) A criticism of the CAPM is that it:
A)ignores the return on the market portfolio.
B)ignores the risk-free return.
C)requires a single measure of systematic risk.
D)utilizes too many factors.
E)None of the above.
Q3) The acronym APT stands for:
A)Arbitrage Pricing Techniques.
B)Absolute Profit Theory.
C)Arbitrage Pricing Theory.
D)Asset Pricing Theory.
E)Assured Price Techniques.
Page 10
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) If the weak form of efficient markets holds,then:
A)technical analysis is useless.
B)stock prices reflect all information contained in past prices.
C)stock prices follow a random walk.
D)All of the above.
E)None of the above.
Q2) An investor discovers that stock prices change drastically as a result of certain events.This finding is a violation of the:
A)moderate form of the efficient market hypothesis.
B)semistrong form of the efficient market hypothesis.
C)strong form of the efficient market hypothesis.
D)weak form of the efficient market hypothesis.
E)None of the above.
Q3) Strong form market efficiency
A)accurately reflects all information,both public and private
B)only accurately reflects private information
C)reflects only public information
D)implies weak form market inefficiency
E)implies semi-strong form market inefficiency
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) Shares of stock that have been repurchased by the corporation are called:
A)treasury stock.
B)undistributed capital stock.
C)retained equity.
D)capital surplus shares.
E)None of the above.
Q2) Corporate financial officers prefer to use book values when measuring debt ratios because:
A)book values are more stable than market values.
B)debt covenant restrictions are usually expressed in book value terms.
C)rating agencies measure debt ratios in book values terms.
D)All of the above.
E)None of the above.
Q3) If a group other than management solicits the authority to vote shares to replace management,a _____ is said to occur.
A)proxy fight
B)stockholder derivative action
C)tender offer
D)vote of confidence
E)None of the above.
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Chapter 20: Raising Capital
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Sample Questions
Q1) In comparison to debt issuance expenses,the total direct costs of equity issues are:
A)considerably less.
B)about the same.
C)meaningless.
D)considerably greater.
E)None of the above.
Q2) Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3.Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.
Q3) Companies use tombstone advertisements in the financial press to:
A)announce the death of the company.
B)announce the failure of a financial strategy.
C)announce the availability of a new issue of a corporate security.
D)notify the public of foreclosure.
E)None of the above.
Q4) Fourth-round financing: Money provided for firms that are likely to go public within half a year.This round is also known as bridge financing.
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Page 13
Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) Several rumors concerning Wyslow,Inc.stock have started circulating.These rumors are causing the market price of the stock to be quite volatile.Given this situation,you decide to buy both a one-month put and a one month call option on this stock with an exercise price of $15.You purchased the call at a quoted price of $.40 and the put at a price of $2.30.What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?
A)$190
B)$230
C)$830
D)$910
E)$1,500
Q2) You purchased four WXO 30 call option contracts at a quoted price of $.34.What is your net gain or loss on this investment if the price of WXO is $33.60 on the option expiration date?
A)-$1,576
B)-$136
C)$1,304
D)$1,440
E)$1,576
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Page 14
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) Calculate N(d<sub>2</sub>).
A).5000
B).5988
C).6164
D).7468
E).7595
Q2) The NPV approach must be:
A)augmented by added analysis if there are a few embedded options.
B)augmented by added analysis if a decision has significant embedded options.
C)jettisoned if there are any embedded options.
D)computed carefully to identify the options.
E)None of the above.
Q3) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's stock
E)Interest rate
Q4) Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis?
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) A convertible preferred stock is similar to a convertible bond except:
A)the conversion ratio is fixed (given).
B)the conversion price is fixed (given).
C)the time to maturity is infinite.
D)All of the above.
E)None of the above.
Q2) Kida Consultants currently has 300,000 shares of common outstanding.Firm value net of debt is $3,900,000.Kida has warrants outstanding with an exercise price of $10.How many warrants must the firm have issued if the gain from exercising a single warrant is $8.25?
Q3) What would the conversion price and conversion ratio be if Mikayla had a 4 for 1 stock split?
A)$5.33;75
B)$8.33;120
C)$22.00;125
D)$27.50;135
E)None of the above.
Q4) Why are warrants and convertibles issued?
Q5) Illustrate and explain how a convertible bond value is based on both debt and equity value.What is the option value?
Page 16
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Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) If a firm sells a floor at 6% this will:
A)pay the holder the LIBOR interest below the 6%.
B)pay the firm 6% on their purchase.
C)pay the holder the LIBOR interest above 6%.
D)limit the amount of borrowing to 6% of assets.
E)None of the above.
Q2) In percentage terms,higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.
A)greater
B)smaller
C)similar
D)smaller or greater
E)None of the above.
Q3) Duration of a pure discount bond:
A)is equal to its half-life.
B)is less than a zero coupon bond.
C)is equal to the liabilities hedged.
D)is equal to its maturity.
E)None of the above.
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Chapter 31: International Corporate Finance
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Sample Questions
Q1) Money deposited in a financial center outside the country whose currency is involved is called:
A)a foreign depository receipt.
B)an international exchange certificate.
C)Euroyen.
D)Eurocurrency.
E)Eurodollars.
Q2) You are analyzing a very low-risk project with an initial cost of £120,000.The project is expected to return £40,000 the first year,£50,000 the second year and £60,000 the third and final year.The current spot rate is £.54.The nominal return relevant to the project is 4 percent in the U.K.and 3 percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?
A)$33,232
B)$34,040
C)$34,067
D)$34,422
E)$35,009
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