Financial Decision Making
Question Bank
Course Introduction
Financial Decision Making explores the principles and analytical tools essential for evaluating and choosing among financial alternatives in business and personal contexts. The course covers concepts such as time value of money, risk and return, capital budgeting, financial statement analysis, and funding strategies. Students learn how to use quantitative methods to support decisions related to investments, financing, and resource allocation, with a focus on both short-term and long-term planning. Emphasis is placed on practical application through case studies and real-world scenarios, preparing students to make informed financial decisions in dynamic and uncertain environments.
Recommended Textbook
CFIN 3 3rd Edition by Scott Besley
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18 Chapters
1302 Verified Questions
1302 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) The financial manager must execute his or her duties independent of the other activities of the firm in order to properly maximize the value of the firm.
A)True
B)False
Answer: False
Q2) Compared to corporations,what is the primary disadvantage of partnerships as forms of business organizations?
A) The tax rates applied to partnership are higher than the tax rates applied to corporations.
B) Any dividends paid to the owners of a partnership business are taxed twice-once at the partnership level and once at the personal, or individual level.
C) Partnerships generally are much easier to form (start up) than corporations.
D) Partnerships have unlimited lives whereas corporations do not.
E) The owners of a partnership-that is, the partners-have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.
Answer: E
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Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA)is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36.What is the return on equity (ROE)?
A) 14.0%
B) 12.5%
C) 15.0%
D) 2.5%
E) 13.5%
Answer: B
Q2) Which of the following financial statements shows a firm's financing activities (how funds were generated)and investment activities (how funds were used)over a particular period of time?
A) balance sheet
B) income statement
C) statement of retained earnings
D) statement of cash flows
E) proxy statement
Answer: A
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Chapter 3: The Financial Environment: Markets, institutions, and Investment Banking
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Sample Questions
Q1) Which of the following is considered an organized stock exchange?
A) New York Stock Exchange (NYSE)
B) National Association of Security Dealers Automated Quotation System (NASDAQ)
C) Over-the-Counter (OTC) market
D) All of the above are organized exchanges.
E) None of the above is an organized exchange.
Answer: A
Q2) A publicly owned corporation is simply a company whose shares are held by the investing public,which may include other corporations and institutions.
A)True
B)False
Answer: True
Q3) Which form of informational market efficiency states that the market price of an asset contains all of the pertinent information regarding the value of that security?
A) Strong-form
B) Semistrong-form
C) Weak-form
D) Economic-form
Answer: A
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Chapter 4: The Time Value of Money
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Q1) When a loan is amortized,the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.
A)True
B)False
Q2) Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial securities.They cannot be used when making decisions about investments in physical assets.
A)True
B)False
Q3) What is the effective annual return (EAR)for an investment that pays 10 percent compounded annually?
A) equal to 10 percent
B) greater than 10 percent
C) less than 10 percent
D) This question cannot be answered without knowing the dollar amount of the investment.
E) None of the above is correct.
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Chapter 5: The Cost of Money
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Sample Questions
Q1) The normal yield curve is upward sloping implying that
A) the return on short-term securities are higher than the return on long-term securities of similar risk.
B) the return on long-term securities are equal to the return on short-term securities of similar risk.
C) the return on short-term securities are lower than the return on long-term securities of similar risk.
D) the return on bonds with a higher default risk is higher than the returns on bonds with lower default risk.
E) the return on bonds with a lower default risk is higher than the returns on bonds with higher default risk.
Q2) Which of the following is not one of the four fundamental factors that affect the cost of money?
A) production opportunities
B) time preferences for consumption
C) risk
D) liquidity
E) inflation
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Page 7
Chapter 6: Bonds Debt-Characteristics and Valuation
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Sample Questions
Q1) The current market price of Smith Corporation's 10 percent,10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually,and the par value is equal to $1,000.What is the YTM (stated on a simple,or annual,basis)if the bonds mature 10 years from today?
A) 8%
B) 6%
C) 4%
D) 2%
E) 1%
Q2) Eurobonds are typically issued as registered bonds rather than bearer bonds. A)True
B)False
Q3) Which type of investor would be most likely to purchase zero coupon bonds?
A) Retired individuals seeking income for current consumption.
B) Individuals in high tax brackets.
C) Tax free investors such as pension funds.
D) Risk averse individuals anticipating increases in interest rates.
E) None of the above.
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Chapter 7: Stocks Equity-Characteristics and Valuation
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Sample Questions
Q1) One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders.
A)True
B)False
Q2) Mesmer Analytic,a biotechnology firm,floated an initial public offering of 2,000,000 shares at a price of $5.00 per share.The firm's owner/managers held 60 percent of the company's $1.00 par value authorized and issued stock following the public offering.One month after the IPO,the firm's board of directors declared a one-time dividend of $0.50 per share payable to all stockholders,meaning that the owner/managers would receive an immediate dividend,in part out of the pockets of the new public stockholders.What was the book value per share of the firm before and after the special dividend was paid?
A) $2.60; $2.10
B) $2.60; $2.60
C) $2.60; $2.30
D) $1.60; $1.10
E) $1.60; $1.00
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The Security Market Line (SML)relates risk to return,for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase,which of the following changes would be most likely to occur?
A) The market risk premium would increase.
B) Beta would increase.
C) The slope of the SML would increase.
D) The required return of an average stock, r<sub>A</sub> = r<sub>M</sub>, would increase.
E) None of the indicated changes would be likely to occur.
Q2) If the risk-free rate is 7 percent,the expected return on the market is 10 percent,and the expected return on Security J is 13 percent,what is the beta of Security J?
A) 1.0
B) 1.5
C) 2.0
D) 2.5
E) 3.0
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) You have recently accepted a one-year employment term by a firm.The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work.If your relevant discount rate is 2 percent per month,then which salary options would you prefer? (Ignore taxes,risk,and consumption needs.)Choose the best answer.
A) The lump sum payment, since it has the larger future value.
B) Monthly payments, since you do not have to wait so long to receive your money.
C) Either one, since they have the same present value.
D) The lump sum payment, since it has the larger present value.
E) Monthly payments, since it has the larger present value.
Q2) The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.
A)True
B)False
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Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) Sensitivity analysis is a risk analysis technique in which key variables are changed and the resulting changes in the NPV and IRR are observed.
A)True B)False
Q2) Quantification of risk is the easiest part of incorporating risk into capital budgeting; treatment of that calculated risk measure is more difficult.
A)True B)False
Q3) If a project is small relative to the total firm,and if its returns are not highly correlated with the returns on the firm's other assets,then the project may not be very risky in either the within-firm (corporate)or the market risk sense,even if the returns on the project are highly uncertain and thus the project has a high degree of stand-alone risk.
A)True B)False
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) Refer to Rollins Corporation.What is Rollins' retained earnings break point?
A) $600,000
B) $800,000
C) $1,000,000
D) $1,200,000
E) $1,400,000
Q2) The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock.
A)True
B)False
Q3) Refer to Gulf Electric Company.What is GEC's cost of equity from newly issued stock?
A) 13.77%
B) 12.66%
C) 13.33%
D) 12.29%
E) 10.00%
Q4) Capital refers to items on the right-hand side of a firm's balance sheet.
A)True
B)False
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Chapter 12: Capital Structure
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Sample Questions
Q1) If debt financing is used,which of the following is correct?
A) The percentage change in net operating income is greater than a given percentage change in net income.
B) The percentage change in net operating income is equal to a given percentage change in net income.
C) The percentage change in net operating income depends on the interest rate charged on debt.
D) The percentage change in net operating income is less than the percentage change in net income.
E) The degree of operating leverage is greater than 1.
Q2) The central result from the work of Miller and Modigliani (MM)and subsequent researchers,is that it is now possible to precisely identify a firm's optimal capital structure.
A)True
B)False
Q3) The management of a firm can control the degree of total leverage to some extent. A)True
B)False
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14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) A reverse split reduces the number of shares outstanding.
A)True
B)False
Q2) If the information content,or signaling,hypothesis is correct,then changes in dividend policy can be important with respect to firm value and capital costs.
A)True
B)False
Q3) The ex dividend date is __________ prior to the holder-of-record date.
A) one business day
B) two business days
C) five business days
D) one week
E) one month
Q4) Firms following a constant dividend ration payout policy will cause investors to have greater uncertainty concerning expected dividends each year when the earnings for the firm are stable over time.
A)True
B)False
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Chapter 14: Working Capital Policy
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Sample Questions
Q1) You have recently been hired to improve the performance of Multiplex Corporation which has been experiencing a severe cash shortage.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 360-day year,what is your estimate of the firm's current cash conversion cycle? Current inventory = $120,000
Annual sales = $600,000
Accounts receivable = $160,000
Accounts payable = $25,000
Total annual purchases = $360,000
Purchases credit terms: net 30 days
Receivables credit terms: net 50 days
A) 49 days
B) 143 days
C) 100 days
D) 168 days
E) 191 days
Q2) A high current ratio insures that a firm will have the cash required to meet its needs.
A)True
B)False
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) The target cash balance is the minimum cash balance a firm desires to maintain in order to conduct business.
A)True B)False
Q2) Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.
A)True B)False
Q3) The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.
A)True
B)False
Q4) Refer to Fashion Clothiers Inc.What is the firm's EOQ?
A) 26,833
B) 30,040
C) 43,987
D) 15,218
E) 21,456
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Chapter 16: Managing Short-Term Liabilities Financing
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Q1) Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond.The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years.The firm has the option to renew the loan at market rates.As an alternative,the firm can sell its own 8.5 percent annual coupon bonds,with $1,000 face value and 2-year maturity,at a price of $973.97.Comparing the cost of the two alternatives,how many percentage points lower is the interest rate on the less expensive debt instrument?
A) 0%; the rates are equal.
B) 1.2%
C) 1.0%
D) 1.8%
E) 0.6%
Q2) Firms having difficulty borrowing short-term funds from banks can raise short-term funds by issuing commercial paper.
A)True
B)False
Q3) The calculated cost of trade credit is reduced by paying late.
A)True
B)False
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Page 18
Chapter 17: Financial Planning and Control
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Q1) Lumpy assets are assets that cannot be acquired in small increments; they must be obtained in large discrete amounts.
A)True
B)False
Q2) The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.
A)True
B)False
Q3) Everything else equal,the higher the DFL is for a firm,the closer its operations are to its financial breakeven point.
A)True
B)False
Q4) It is more difficult to estimate fixed and variable cost per unit for a project during planning than once the project is underway.This is because,once a project is operational,the firm has access to clearly reported and separated actual costs that the project incurs.
A)True
B)False
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Chapter 18: project Cash Flows and Risk
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Q1) A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative,other things being equal.
A)True
B)False
Q2) Other things held constant,which of the following would increase the NPV of a project being considered?
A) A shift from MACRS to straight-line depreciation.
B) Making the initial investment in the first year rather than spreading it over the first 3 years.
C) A decrease in the discount rate associated with the project.
D) The sale of the old machine, in a replacement decision, at a capital loss rather than at book value.
E) An increase in required working capital.
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