Financial Decision Making
Question Bank
Course Introduction
Financial Decision Making explores the core concepts and tools necessary for sound financial analysis and decision-making within organizations. The course examines fundamental principles such as time value of money, risk and return, capital budgeting, cost of capital, financial statement analysis, and working capital management. Through case studies and practical exercises, students learn to evaluate investment opportunities, assess financing options, and implement strategies for maximizing firm value. The course equips students with the quantitative and qualitative skills needed to make informed financial decisions in both personal and professional contexts.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) In a typical partnership,liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) In a limited partnership,the limited partners have voting control,while the general partner has operating control over the business,and the limited partners are individually responsible,on a pro rata basis,for the firm's debts in the event of bankruptcy.
C) A slow-growth company,with little need for new capital,would be more likely to organize as a corporation than would a faster growing company.
D) Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability,the need to reorganize when a partner dies,and the illiquidity (difficulty buying and selling)of partnership interests.
E) A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
Answer: D
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3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) If you wanted to know what rate of return stocks have provided in the past,you could examine data on the Dow Jones Industrial Index,the S&P 500 Index,or the NASDAQ Index.
A)True
B)False
Answer: True
Q2) The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
A)True
B)False
Answer: True
Q3) A simple average of those returns (which gives equal weight to each company in the S&P 500)is then calculated.That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
A)True
B)False Answer: False
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Rao Construction recently reported $28.00 million of sales,$12.60 million of operating costs other than depreciation,and $3.00 million of depreciation.It had $8.50 million of bonds outstanding that carry a 7.0% interest rate,and its federal-plus-state income tax rate was 40%.What was Rao's operating income,or EBIT,in millions?
A) $11.66
B) $11.78
C) $12.15
D) $12.40
E) $13.52
Answer: D
Q2) The balance sheet represents a snapshot in time,whereas the income statement reports on operations over a period of time.
A)True
B)False
Answer: True
Q3) EBITDA stands for "earnings before interest,taxes,debt,and assets."
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Last year Rennie Industries had sales of $270,000,assets of $175,000 (which equals total invested capital),a profit margin of 5.3%,and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs.The firm finances using only debt and common equity.Had it reduced its assets by this amount,and had the debt/total invested capital ratio,sales,and costs remained constant,how much would the ROE have changed? Do not round your intermediate calculations.
A) 4.08%
B) 3.03%
C) 4.52%
D) 3.07%
E) 4.04%
Q2) Refer to Exhibit 4.1.What is the firm's TIE? Do not round your intermediate calculations.
A) 4.99
B) 4.81
C) 5.32
D) 4.67
E) 5.09
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.Merchants Bank offers to lend you the $50,000,but it will charge 6.8%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?
A) 2.07%
B) 2.00%
C) 1.73%
D) 1.71%
E) 2.12%
Q2) Last year Dania Corporation's sales were $525 million.If sales grow at 9.8% per year,how large (in millions)will they be 8 years later?
A) $1,142.39
B) $1,109.12
C) $1,364.22
D) $1,131.30
E) $842.93
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True B)False
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS)is 1.80%.Suppose further that the MRP on a 10-year T-bond is 0.90%,that no MRP is required on a TIPS,and that no liquidity premium is required on any T-bond.Given this information,what is the expected rate of inflation over the next 10 years? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.
A) 2.66%
B) 1.88%
C) 2.35%
D) 2.00%
E) 2.49%
Q2) Which of the following factors would be most likely to lead to an increase in nominal interest rates?
A) Households reduce their consumption and increase their savings.
B) A new technology like the Internet has just been introduced,and it increases investment opportunities.
C) There is a decrease in expected inflation.
D) The economy falls into a recession.
E) The Federal Reserve decides to try to stimulate the economy.
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Page 8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a coupon bond is selling at par,its current yield equals its yield to maturity.
B) If rates fall after its issue,a zero coupon bond could trade at a price above its maturity (or par)value.
C) If rates fall rapidly,a zero coupon bond's expected appreciation could become negative.
D) If a firm moves from a position of strength toward financial distress,its bonds' yield to maturity would probably decline.
E) If a bond is selling at a premium,this implies that its yield to maturity exceeds its coupon rate.
Q2) Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.
A)True
B)False
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
A)True
B)False
Q2) Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.
A)True
B)False
Q3) Someone who is risk averse has a general dislike for risk and a preference for certainty.If risk aversion exists in the market,then investors in general are willing to accept somewhat lower returns on less risky securities.Different investors have different degrees of risk aversion,and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return)than investors who have more tolerance for risk.
A)True
B)False
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Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r<sub>s</sub> = 10.5%,and the expected constant growth rate is g = 8.2%.What is the stock's current price?
A) $27.39
B) $29.02
C) $32.61
D) $38.80
E) $27.07
Q2) A stock just paid a dividend of D<sub>0</sub> = $1.50.The required rate of return is r<sub>s</sub> = 14.1%,and the constant growth rate is g = 4.0%.What is the current stock price?
A) $19.15
B) $12.97
C) $12.82
D) $18.84
E) $15.45
Q3) The corporate valuation model cannot be used unless a company pays dividends. A)True B)False
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Page 11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) The MacMillen Company has equal amounts of low-risk,average-risk,and high-risk projects.The firm's overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects,but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees,on the grounds that even though projects have different risks,the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted,what is likely to happen over time?
A) The company will take on too many high-risk projects and reject too many low-risk projects.
B) The company will take on too many low-risk projects and reject too many high-risk projects.
C) Things will generally even out over time,and,therefore,the firm's risk should remain constant over time.
D) The company's overall WACC should decrease over time because its stock price should be increasing.
E) The CEO's recommendation would maximize the firm's intrinsic value.
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the crossover rate.
A)True
B)False
Q2) Simms Corp.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative,in both cases it will be rejected. \[\begin{array} { l c c c c }
\text { Year } & 0 & 1 & 2 & 3 \\ \hline \text { Cash flows } & - \$ 1,025 & \$ 425 & \$ 425 & \$ 425 \end{array}\] A) 9.64% B)
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following factors should be included in the cash flows used to estimate a project's NPV?
A) All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
B) Interest on funds borrowed to help finance the project.
C) The end-of-project recovery of any additional net operating working capital required to operate the project.
D) Cannibalization effects,but only if those effects increase the project's projected cash flows.
E) Expenditures to date on research and development related to the project,provided those costs have already been expensed for tax purposes.
Q2) Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.
A)True
B)False
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Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) A firm's optimal capital budget consists of all independent projects with positive NPVs plus those mutually exclusive projects that have the highest positive NPVs.
A)True
B)False
Q2) For planning purposes,managers must forecast the total capital budget because the amount of capital raised affects the WACC.
A)True
B)False
Q3) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
Q4) Traditionally,an NPV analysis assumes that projects will be accepted or rejected,which implies that they will be undertaken now or never.However,in practice,companies sometimes have a third choice--delay the decision until later,when more information will be available.
A)True
B)False
Page 15
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Business risk is affected by a firm's operations.Which of the following is NOT directly associated with (or does not directly contribute to)business risk?
A) Demand variability.
B) Sales price variability.
C) The extent to which operating costs are fixed.
D) The extent to which interest rates on the firm's debt fluctuate.
E) Input price variability.
Q2) Southwest U's campus book store sells course packs for $18 each,the variable cost per pack is $8,fixed costs to produce the packs are $200,000,and expected annual sales are 51,000 packs.What are the pre-tax profits from sales of course packs?
A) $285,200
B) $310,000
C) $306,900
D) $248,000
E) $372,000
Q3) If a firm borrows money,it is using financial leverage.
A)True
B)False
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16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) If the information content,or signaling,hypothesis is correct,then a change in a firm's dividend policy can have an important effect on its stock price and cost of equity.
A)True
B)False
Q2) If a firm uses the residual dividend model to set dividend policy,then dividends are determined as a residual after providing for the equity required to fund the capital budget.Under this model,the higher the firm's debt ratio,the lower its payout ratio will be,other things held constant.
A)True
B)False
Q3) If on January 3 a company declares a dividend of $1.50 per share,payable on January 31 then the price of the stock should drop by approximately $1.50 on January 31.
A)True
B)False
Q4) A "reverse split" reduces the number of shares outstanding.
A)True
B)False
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Chapter 16: Working Capital Management
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Q1) If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
A)True
B)False
Q2) If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease other things held constant.
A)True
B)False
Q3) One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.
A)True
B)False
Q4) Because money has time value,a cash sale is always more profitable than a credit sale.
A)True
B)False
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Chapter 17: Financial Planning and Forecasting
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Sample
Questions
Q1) Fairchild Garden Supply expects $700 million of sales this year,and it forecasts a 15% increase for next year.The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales).All dollars are in millions.What is the projected inventory turnover ratio for the coming year?
A) 2.78 times
B) 2.82 times
C) 4.35 times
D) 3.79 times
E) 3.48 times
Q2) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q3) The first,and most critical,step in constructing a set of forecasted financial statements is the sales forecast.
A)True
B)False
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Chapter 18: Derivatives and Risk Management
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Q1) Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?
A) An increase in GCC's stock price.
B) An increase in the exercise price of the option.
C) An increase in the amount of time until the option expires.
D) An increase in the risk-free rate.
E) GCC's stock price becomes more risky (higher variance).
Q2) Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 7-year,semiannual payment,6% coupon Treasury note is 105-210.If the note has a $1,000 par value,what is the implied Treasury note rate? Do not round your intermediate calculations.
A) 5.04%
B) 4.33%
C) 5.34%
D) 3.83%
E) 4.28%
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 19: Multinational Financial Management
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Q1) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q2) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
Q4) Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially,the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred
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Q1) A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it.Most traded warrants are originally attached to bonds or preferred stocks.
A)True
B)False
Q2) From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as the riskiness of the lessee's
A) equity cash flows.
B) capital budgeting project cash flows.
C) debt cash flows.
D) pension fund cash flows.
E) sales.
Q3) Refer to Exhibit 20.1.What is the bond's initial conversion value when issued?
A) $672.09
B) $830.23
C) $593.02
D) $909.30
E) $790.70
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Chapter 21: Mergers and Acquisitions
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Q1) Which of the following statements is most CORRECT?
A) The acquiring firm's required rate of return in most horizontal mergers will not be affected,because the two firms will have similar betas.
B) The goal of merger valuation is to value the target firm's total capital at the target firm's weighted average cost of capital because a firm is acquired from all of its investors--both shareholders and creditors.
C) The basic rationale for any financial merger is synergy and,thus,the estimation of pro forma cash flows is the single most important part of the analysis.
D) In most mergers,the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
E) The primary rationale for most operating mergers is synergy.
Q2) A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.
A)True
B)False
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