Financial Decision Making Review
Questions
Course Introduction
Financial Decision Making is a comprehensive course that explores the principles and techniques necessary for making informed financial choices in both personal and organizational contexts. The course covers the analysis of financial statements, budgeting, risk assessment, and the evaluation of investment and financing options. Students will develop critical thinking and problem-solving skills by applying quantitative methods and financial models to real-world scenarios. Emphasis is placed on understanding the impact of financial decisions on business strategy and performance, as well as ethical considerations in the decision-making process. This course prepares students to make sound financial judgments that support sustainable growth and value creation.
Recommended Textbook
Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Which of the following is the purest and most basic form of corporate ownership?
A) bond
B) notes
C) common stock
D) preferred stock
Answer: C
Q2) Financial managers perform different tasks developing a financial plan or budget, extending credit to customers, evaluating proposed large expenditures, and raising money to fund a firm's operations.
A)True
B)False
Answer: True
Q3) A financial manager's financing decisions determine ________.
A) both the mix and the type of assets found on the firm's balance sheet
B) the most appropriate mix of short-term and long-term financing
C) both the mix and the type of assets and liabilities found on the firm's balance sheet
D) the proportion of the firm's earnings to be paid as dividend
Answer: B
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3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) In the Eurobond market, corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.
A)True
B)False
Answer: True
Q2) The tax liability of a corporation with ordinary income of $105,000 is ________.
Range of taxable income Marginal rate
$ 0 to $ 50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
A) $42,000
B) $35,700
C) $23,950
D) $24,450
Answer: D
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The inventory management at Dana Dairy Products ________ since 2012. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved slightly
D) cannot be determined
Answer: C
Q2) ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods.
A) Net profit margin
B) Operating profit margin
C) Gross profit margin
D) Earnings available to common shareholders
Answer: C
Q3) The stockholder's report includes ________.
A) an estimated interest cost report
B) an estimated dividend report
C) a break-even sales report
D) a statement of retained earnings
Answer: D
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) Which of the following is a source of cash flows?
A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock
Q2) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. At the end of August, the firm
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500
Q3) If the net cash flow is less than the minimum cash balance, financing is required. A)True B)False
Q4) If the ending cash is greater than the minimum cash balance, excess cash exists. A)True B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be ________.
A) $19,636
B) $91,524
C) $98,846
D) $21,207
Q2) Future value increases with increases in the interest rate or the period of time funds are left on deposit.
A)True
B)False
Q3) If the present value of a perpetual income stream is increasing, the discount rate must be ________.
A) increasing
B) decreasing
C) changing unpredictably
D) increasing proportionally
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A trustee is a paid party representing the bond issuer in the bond indenture.
A)True
B)False
Q2) The value of a bond is the present value of the ________.
A) dividends and maturity value
B) interest and dividend payments
C) maturity value
D) interest payments and maturity value
Q3) An example of a standard debt provision is to ________.
A) limit the corporation's annual cash dividend payments
B) pay taxes and other liabilities when due
C) restrict the corporation from disposing of fixed assets
D) maintain a minimum level of liquidity
Q4) The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________.
A) not related
B) inversely related
C) independent
D) perfectly positively correlated
Q5) Explain liquidity, default risk, and maturity risk premiums.
Page 8
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Chapter 7: Stock Valuation
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Sample Questions
Q1) ________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.
A) Rights offering
B) Treasury stocks
C) Preemptive rights
D) Proxy statements
Q2) Which of the following is true of equity?
A) equityholders do not have voting rights.
B) It does not mature, so repayment is not required.
C) It is a temporary form of financing for a firm.
D) Equity financing is obtained from creditors.
Q3) ________ is a guide to a firm's value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.
A) Liquidation value
B) Book value
C) The P/E multiple
D) The present value of the dividends
Q4) Calculate the estimated dividend for 2015. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25
Q2) ________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.
A) Variance
B) Standard deviation
C) Probability distribution
D) Range
Q3) The interest rate risk associated with Treasury bonds is much higher than with bills.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.2)
A) 6.8 percent
B) 7.7 percent
C) 9.44 percent
D) 11.29 percent
Q2) The cost to a firm of each type of capital is dependent upon ________.
A) the risk-free rate of bonds plus the business risk of the firm
B) the risk-free rate of each type of capital plus the business risk of the firm
C) the risk-free rate of each type of capital plus the financial risk of the firm
D) the risk-free rate of each type of capital plus the business risk and the financial risk of the firm
Q3) One major expense associated with issuing new shares of common stock is ________.
A) coupon payment
B) sunk cost
C) overvaluation
D) underpricing
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.
A)True
B)False
Q2) What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
A) $1,700,000
B) $371,764
C) -$137,053
D) -$4,862,947
Q3) ________ projects do not compete with each other; the acceptance of one ________ the others from consideration.
A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; eliminates
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Page 12
Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) Cash flows that could be realized from the best alternative use of an owned asset are called ________.
A) incremental costs
B) lost resale opportunities
C) opportunity costs
D) sunk costs
Q2) Under MACRS depreciation, the depreciable value of an asset is equal to the asset's purchase price minus any installation costs.
A)True
B)False
Q3) If an asset is depreciable and used in business, any loss on the sale of the asset is tax-deductible only against other capital gains income, not against ordinary income.
A)True
B)False
Q4) The three major cash flow components include the initial investment, nonoperating cash flows, and terminal cash flow.
A)True
B)False
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) The net present value of the project when adjusting for risk is ________. (See Table 12.2)
A) -$9,300
B) $0
C) $87,000
D) $105,000
Q2) The risk-adjusted discount rate (RADR) is the rate of return that must be earned on a given project to compensate a firm's owners adequately, that is, to maintain or improve the firm's share price.
A)True
B)False
Q3) In CAPM, the total risk is defined as the sum of nondiversifiable and diversifiable risk.
A)True
B)False
Q4) The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.
A)True
B)False
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar contribution margin.
A)True
B)False
Q2) Financial leverage measures the effect of fixed financing costs on the relationship between ________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) net income and sales
Q3) Generally, increases in leverage result in increased return and risk.
A)True
B)False
Q4) A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.
A) 0.77
B) 1.30
C) 0.81
D) 4.29
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Chapter 14: Payout Policy
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Sample Questions
Q1) The purpose of a stock split is to ________.
A) change a firm's capital structure
B) decrease the dividend
C) enhance the trading activity of the stock by lowering the market price
D) increase the market price of a stock
Q2) According to ________, investors' demands for dividends fluctuate over time.
A) the catering theory
B) Modigliani and Miller theory
C) the residual theory of dividends
D) CAPM theory
Q3) In a tender offer share repurchase, a firm announces the price it is willing to pay to buy back shares and the quantity of shares it wishes to repurchase.
A)True
B)False
Q4) Because dividends are taxed at the same rate as capital gains under the 2003 Tax Act, a firm's strategy of paying low or no dividends primarily offers tax advantages to wealthy stockholders through tax deferral.
A)True
B)False
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) Which of the following is an attribute of a banker's acceptance?
A) It is an unsecured note of issuer with large denominations.
B) It has a maturity of 1 day to 3 years.
C) Its risk and return is higher than U.S. Treasury issues.
D) It is issued by a corporation with a high credit standing.
Q2) Delaying the payment of accounts payable in order to improve cash management is known as ________.
A) ACH transfers
B) stretching payables
C) credit scoring
D) lockbox system
Q3) The General Chemical Company uses 150,000 gallons of hydro chloric acid per month. The cost of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the chemical is $150 per order. The firm uses the chemical at a constant rate throughout the year. The chemical's economic order quantity is
A) 32,863 gallons
B) 11,619 gallons
C) 9,487 gallons
D) 1,900 gallons
Page 17
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Global Logistics purchased a new machine on October 20th, 2014 for $1,000,000 on credit. The supplier has offered A&A terms of 2/10, net 45. The current interest rate the bank is offering is 16 percent.
(a) Compute the cost of giving up cash discount.
(b) Should the firm take or give up the cash discount?
(c) What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis?
Q2) For firms that are able to raise funds through the sale of commercial paper, it is generally cheaper than borrowing from a commercial bank.
A)True
B)False
Q3) Operating-change restrictions gives the bank a right to revoke the line of credit if any major changes occur in a firm's financial condition or operations.
A)True
B)False
Q4) Secured short-term financing has specific assets pledged as collateral.
A)True
B)False
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Page 18
Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) When warrants are exercised, ________.
A) only the number of common shares outstanding increases
B) debt is increased
C) both debt and equity are reduced
D) there is no effect on the firm's capital structure
Q2) The option buyer who expects a stock price to decline will purchase ________.
A) a call
B) a warrant
C) a put
D) a convertible bond
Q3) An operating lease is when the present value of all its payments included as an asset and corresponding liability on a firm's balance sheet.
A)True
B)False
Q4) A financial lease is often referred as a capital lease.
A)True
B)False
Q5) Convertibles can be used as a form of deferred common stock financing.
A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) Pyramiding is an arrangement among holding companies wherein one company controls others, thereby causing an even greater magnification of earnings and losses.
A)True
B)False
Q2) A stock swap transaction is an acquisition method in which an acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.
A)True
B)False
Q3) The greater the leverage, the smaller the risk involved.
A)True
B)False
Q4) The ability to use the same sales and distribution channels to reach customers of both businesses is a benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
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Page 20
Chapter 19: International Managerial Finance
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Sample Questions
Q1) Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is a differing inflation rate between two countries.
A)True
B)False
Q2) ________ is a major South American trading bloc that includes countries that account for more than half of total Latin American GDP.
A) The group of five
B) Mercosur
C) Latin and South American Free Trade Area (LASTA)
D) The group of seven
Q3) Foreign exchange risk refers to the risk created by ________.
A) the potential seizure of an MNC's operations in a host country
B) the varying exchange rate between two currencies
C) the fixed exchange rate between two currencies
D) the potential nationalization of the MNC's operations by a host government
Q4) A functional currency is the currency of the parent company's country.
A)True
B)False
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