Course Introduction
Financial Decision Making
Study Guide Questions
Financial Decision Making explores the principles, tools, and strategies that individuals and organizations use to make informed choices regarding the allocation of financial resources. The course covers core concepts such as financial statement analysis, budgeting, capital budgeting, risk assessment, the time value of money, and investment evaluation. Students will learn to interpret financial data, assess financial risks, and make strategic decisions aimed at optimizing financial performance and value creation. Through case studies and practical exercises, participants will develop analytical and decision-making skills essential for effective financial management in both personal and professional contexts.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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27 Chapters
2109 Verified Questions
2109 Flashcards
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) A major disadvantage of a sole proprietorship is the fact that
A)it is expensive to establish
B)the owner has unlimited personal liability
C)it is easy to finance growth
D)the owner pays taxes on all the income
Answer: B
Q2) Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include all of the following except:
A)collect all the facts bearing on the problem
B)clarify the parameters of the problem
C)involve all parties with a financial interest in the outcome
D)seek equity for those who may be affected
Answer: C
Q3) are largely outside of the direct control of managers.
A)investment strategies
B)economic environment factors
C)major policy decisions
D)dividend policies
Answer: B
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) Financial intermediaries
A)issue secondary claims to the lender
B)are compensated for their services by fixed fees
C)include both brokers and dealers
D)issue primary claims to the lender
Answer: A
Q2) Finance companies obtain a significant amount of their funds by
A)issuing their own equity securities
B)accepting both demand and time deposits
C)issuing their own debt securities
D)pooling funds
Answer: C
Q3) In the market, the firm receives the proceeds from the sale of its securities.
A)over-the-counter
B)secondary
C)fully integrated
D)primary
Answer: D
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) If a firm's price to earnings (P/E) ratio is 10,
A)it is not possible for it to be paying dividends also
B)its market to book ratio has to be at least 2.0
C)its net profit margin is positive
D)its return on stockholders' equity is negative
Answer: C
Q2) Companies can avoid paying income taxes on inventory profits by using the inventory valuation method.
A)LIFO
B)FIFO
C)Priced out
D)Priced in
Answer: A
Q3) The greater the amount of financial leverage used by a firm, the greater its , all other things being equal.
A)profitability
B)liquidity
C)risk
D)size
Answer: C
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of cash flows using the:
A)indirect method
B)direct method
C)reconciliation method
D)none of the answers is correct
Q2) All the following current liabilities normally vary directly with sales except:
A)accounts payable
B)notes payable
C)accrued wages
D)accrued taxes
Q3) In those industries where capacity can be added only in discrete or "lumpy" increments, fixed assets are increased in a manner as sales increase.
A)proportional
B)stepwise
C)direct relationship
D)discriminant
Q4) What information does a long-term financial plan offer?
Q5) Explain the cash flow generation process:
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) The more frequent the compounding the
A)greater the present value
B)greater the amount deposited
C)greater the effective interest rate
D)lesser the future value
Q2) If the discount rate is 12%, what is the present value of the following cash flows: \[\begin{array} { l c } \text { Year } & \text { Cash Flow } \\
1 & \$ 10,000 \\
2 & \$ 11,000 \\
3 & \$ 12,000 \\
4 & \$ 13,000 \\
5 & \$ 14,000 \\
6 - 15 & \$ 15,000 \text { each year } \end{array}\]
A)$144,618
B)$127,923
C)$127,197
D)$ 90, 537
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Chapter 5: A: The Time Value of Money
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Sample Questions
Q1) Paula invested $25 into a savings account when she was 6 years old.She is now 35.Her money grew at 2% compounded continuously.How much money does she have?
A)$106.58
B)$85.19
C)$270.82
D)$44.65
Q2) What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously?
A)$21,240
B)$11,080
C)$16,421
D)none of these
Q3) What is the effective interest rate if 10% is compounded continuously?
A)10.52%
B)10.97%
C)11.06%
D)10.11%
Q4) With continuous compounding, why is the effective rate higher than the nominal rate?
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Sample Questions
Q1) Yummy Tummy Bakeries has issued a 30 year par value bond that is callable in 5 years.If the coupon rate is 5.5% payable semiannually, what is the bond's yield to call if the yield to maturity is 8% and the call premium is one year's interest?
A)12.65%
B)18.91%
C)14.42%
D)10.62%
Q2) What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00.
A)$85.71
B)$38.14
C)$59.33
D)$60.00
Q3) bonds normally are denominated in the currency of the country of sale.
A)Eurodollar
B)International
C)Foreign
D)LIBOR
Q4) Explain a sinking fund.
Page 9
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) In a reverse stock split
A)the number of shares are decreased
B)the market value is decreased
C)retained earnings decrease
D)par value decreases
Q2) During the past 10 years, Saturn's common stock dividends have grown from $0.24 to $0.62.If the past growth of dividends is expected to continue at the same rate in the future, what is the current value of Saturn's common stock to an investor who requires an 18% rate of return?
A)$7.75
B)$3.79
C)$8.53
D)$10.42
Q3) In a liquidation of a firm due to bankruptcy, which of the following usually gets paid last?
A)bondholders
B)preferred stockholders
C)common stockholders
D)employees wages
Q4) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) HDTV has planned on diversifying into the dual-VCR field.As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%.The expected market return, km, is 14%;the risk free rate, rf, is 7%;and the current dividend, Do, is $0.50.Should HDTV go into the dual-VCR field?
A)No-stock price decrease $7.82
B)Yes-stock price increase $9.89
C)Yes-stock price increase $3.81
D)No-stock price decrease $3.78
Q2) Lotte Group is planning on diversifying into the transportation industry.As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%.Currently the risk-free rate is 5.0% and the market risk premium is 8.6%.If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry?
A)No, stock price does not increase
B)No, stock price declines about $10.11
C)Yes, stock price increases about $19.42
D)Yes, stock price increases by about $26.27
Q3) List types of events that influence systematic (non-diversifiable) risk.
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Page 11
Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Capital Foods purchased an oven 5 years ago for $45,000.The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000.Capital is planning to replace the oven with a more automated one that will cost $150,000 installed.If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.
A)$900
B)$2,000
C)$127,000
D)$25,000
Q2) Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed.The old system cost $140,000 and had been depreciated as a 10-year MACRS asset.Its salvage value is $10,000.What is the NINV for the new equipment? Assume a 40% tax rate.Use the rounded MACRS schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
A)$170,000
B)$157,200
C)$202,514
D)$151,228
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Entrepreneurial firms with a net worth of less than $1 million tend to prefer the method for evaluating capital expenditures.
A)NPV
B)IRR
C)Payback
D)Profitability index
Q2) The profitability index (PI) approach:
A)fails to directly consider the timing of a project's cash flows
B)considers only a project's contributions to net income and does not consider cash flow effects
C)always gives the same accept-reject decisions for independent projects as does NPV and IRR
D)always gives the same accept-reject decisions for mutually exclusive projects as does NPV and IRR
Q3) The objective in solving capital rationing problems is to:
A)accept all projects with a PI greater than 1.1
B)maximize the IRR of the projects that are accepted
C)maximize the NPV of the projects that are accepted
D)minimize the opportunity cost of the firm's funds
Page 13
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Quorex is evaluating two mutually exclusive projects.Project A has a net investment of $48,000 and net cash flows over a six year period of $12,500 per year.Project B also has a net investment of $48,000 but its net cash flows of $8,640 per year will occur over a 12 year period.If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen and what is its NPV?
A)A, $862
B)A, $1,800
C)B, $2,475
D)B, $902
Q2) Kaneb is evaluating two alternative pipeline welders.Welder A costs $310,000, has a 7 year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years.Welder B costs $320,000, has a 5 year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years.Kaneb's cost of capital is 16%.Using the equivalent annual annuity method, which alternative should be chosen and what is its NPV?
A)B, $4,920
B)A, $7,111
C)B, $10,650
D)A, $7,800
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) SCAN is a multi-divisional utility company.SCAN has four divisions with the following betas and proportions of the firm's total assets:
\(\begin{array}{llc}
\frac{\text { Division }}{\text { Electric \& Gas }} & \frac{\text { Beta }}{0.85} & \frac{\%
\text { of Assets }}{60} \\
\text { Bus transportation } & 0.95 & 10 \\
\text { Real estate } & 1.40 & 25 \\
\text { Recreation } & 1.15 & 5
\end{array}\)
What is the firm's weighted average beta?
A) 1.01
B) 1.53
C) 0.93
D) 1.13
Q2) A major disadvantage of the risk-adjusted discount rate approach is that it
A)can lead to selecting only above-average risk projects
B)provides the decision maker with a range of numbers
C)can lead to selecting only below-average risk projects
D)is difficult to estimate the appropriate risk premium for a project
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Page 15
Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Sample Questions
Q1) Surfin' Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00.It is estimated that Surfin' Bubba will have a growth rate in earnings of 10% into the foreseeable future.If Surfin' Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price?
A)13.49%
B)11.57%
C)12.21%
D)10.87%
Q2) There are four major components that determine the risk premium.They include all the following except
A)interest rate risk
B)business risk
C)reinvestment rate risk
D)financial risk
Q3) The cost of debt must account for all of the following inputs EXCEPT:
A)Bond ratings.
B)Issuance costs.
C)Flotation costs.
D)The tax rate.
Page 16
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) According to the "pecking order theory," firms prefer to issue securities first and then issue securities as a last resort.
A)equity, debt
B)debt, convertible debt
C)debt, equity
D)equity, convertible debt
Q2) Which of the following statements is (are) true concerning the relationship between the firm's cost of equity and its capital structure (as measured by the debt ratio)?
A)The exact relationship between the cost of equity and the debt ratio is difficult to determine.
B)The range of debt ratios where the cost of equity begins to increase rapidly varies by firm and industry depending on the firm's age.
C)The relationship is a saucer-shaped curve.
D)The relationship is determined by the static tradeoff theory.
Q3) What is the pecking order theory with regard to managerial preferences for financing alternatives?
Q4) How do signaling effects impact the firm's capital structure decision?
Q5) There are many factors that influence a firm's business risk.List them.
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) Twin City Printing is considering two financial alternatives for financing a major expansion program.Under either alternative EBIT is expected to be $15.6 million.Currently the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds.Under the debt financing alternative $10 million in 12% long term bonds will be sold and under the equity financing alternative the firm would sell 500,000 shares of common stock.The PIE under the debt alternative would be 15 and the PIE under the equity alternative would be 16.The firm's marginal tax rate is 40%.Which alternative would produce the higher stock price?
A)debt-stock price of $23.70
B)debt-stock price of $32.29
C)equity-stock price of $25.12
D)equity-stock price of $33.28
Q2) Last year Avator's operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%.What is Avator's degree of operating leverage (DOL)?
A)0.68
B)2.0
C)1.47
D)0.32
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Chapter 14: A: Capital Structure Management in Practice
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Sample Questions
Q1) The breakeven point occurs where total revenues intersect with:
A)market returns
B)the risk-free rate
C)total costs
D)total interest and taxes
Q2) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes.The finished product sells for $60 with a variable cost per unit of $27.The company has fixed operating costs of $1,250,000.What is its breakeven point?
A)22,187
B)37,879
C)56,124
D)48,961
Q3) Breakeven analysis can be used:
A)when planning renovations
B)when planning expansions
C)when planning financial resources
D)when planning new product development
Q4) How can a firm have more than one breakeven output point?
Q5) List the limitations of breakeven analysis:
19
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Chapter 15: Dividend Policy
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Sample Questions
Q1) The dividend clientele effect concept was originally developed by
A)Myron Gordon
B)Merton Miller and Franco Modigliani
C)Milton Friedman
D)Paul Samuelson
Q2) The Wagner Company tries to follow a pure "residual" dividend policy.Earnings and dividends last year were $100 million and $20 million respectively.Anticipated earnings for this year are $80 million.The company is financed completely with common equity.The required rate of return on retained earnings is 15 percent and the cost of new equity is 16 percent.If Wagner has $70 million of investment projects having expected returns greater than 15 percent, determine the total amount of dividends Wagner should pay.
A)None
B)$10 million
C)$20 million in dividends and raise needed investment funds externally
D)$80 million in dividends and raise needed investment funds externally
Q3) What are the factors that determine the dividend policy of a firm?
Q4) What effect does a stock split have on outstanding shares of stock and what is its purpose?
Q5) Explain the "clientele effect."
Page 20
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Chapter 16: Working Capital Management
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Q1) The rate of return on fixed assets is normally assumed to be the rate of return on current assets (especially cash and marketable securities).
A)less than B)greater than C)equal to D)none of these answers is correct.
Q2) In considering factoring accounts receivable, which of the following statements is/are correct?
I.Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts.
II.Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts.
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q3) Explain trade credit.
Q4) What is financial forecasting?
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Lone Star Technologies has annual sales of $336 million.Management has determined that an average of 8 days elapses between the time customers mail their payments and when the funds are available to the firm.The cost of reducing the float 3 days will be $60,000.Should Lone Star work to reduce the float if the increase in cash can be invested to earn 7.5% per annum?
A)Yes, savings of $9,041
B)Yes, savings of $147,123
C)Yes, savings of $78,080
D)No, loss of $18,080
Q2) To minimize the cost associated with misdirected funds between subsidiaries, many multinational companies have instituted a process called .
A)multinational cash consolidation
B)multilateral netting
C)unilateral netting
D)cash restriction
Q3) Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.
Q4) Explain how companies can slow disbursements in order to keep funds in the bank for longer periods of time.
Page 22
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) The objective of offering seasonal datings to customers is to
A)encourage customers to place their orders prior to the peak selling period
B)speed up the collection of accounts receivable
C)increase the firm's inventory storage costs
D)reduce the number of bad checks received from customers
Q2) The most widely known credit-reporting organization is:
A)Phelps Credit Services
B)Dun & Bradstreet Credit Services
C)Equitable Credit Services
D)Creditreport.com
Q3) Capacity, which is one of the traditional "five Cs" of credit analysis, refers to
A)the general economic climate and its effect on the applicant's ability to pay
B)the willingness of the applicant to meet its financial obligations
C)the financial strength of the applicant (i.e., net worth)
D)the ability of an applicant to meet its financial obligations
Q4) What are seasonal datings as it applies to credit terms?
Q5) What are the "five Cs of credit" and how are they used?
Page 23
Q6) How can a company use its credit period to affect sales and inventory?
Q7) What information could be used to judge the credit worthiness of a customer?
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) What are the disadvantages of leasing?
Q2) A sale and leaseback agreement
A)is usually an operating lease
B)is rarely used in today's leasing agreements
C)is a method of providing liquidity for the lessee
D)frequently is used for machinery financing, but rarely used in real estate
Q3) All of the following are disadvantages of leasing except
A)difficulty in making property improvements
B)financial leases are non-cancelable
C)normally higher maintenance charges
D)generally higher cost than ownership
Q4) In a(n) , the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.
A)operating lease
B)capital lease
C)leveraged lease
D)term lease
Q5) What is a term loan?
Q6) What are the advantages of leasing?
Q7) Explain a leveraged lease.
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Chapter 20: Financing with Derivatives
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Q1) The capital structure of Springmaid Company is as follows:
Long-term debt $ 400 million
Common stock, $1 par 50 million
Contributed capital in excess of par 250 million
Retained earnings 600 million
Total $ 1,300 million
The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached.Each $1,000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20.Assume that no other changes in the capital structure occur between now and the time the warrants are exercised.Determine the contributed capital in excess of par account balance after exercise of the warrants.
A)$250 million
B)$330 million
C)$254 million
D)$326 million
Q2) Why would a company issue convertible securities instead of straight bonds?
Q3) List some securities that have option features.
Q4) What variables affect the call option valuation?
Q5) What is the difference between a conversion price and a conversion ratio?
Page 25
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Chapter 20: A: Financing with Derivatives
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Q1) Cutech issued a $150 million of a 20-year, 10.5% debt 5 years ago.Since then, Cutech's financial conditions have improved and management believes that they could refund the old issue with a new 15-year, 7.5% issue.The old debt is now callable at 104 percent of par and issuance costs on the new issue would be 0.6 percent.The unamortized issuance costs on the old issue are $675,000.If Cutech calls the old issue and refunds it, both issues would be outstanding for a two-week period.If the company's marginal tax rate is 40%, should Cutech refund the old issue?
A)Yes, NPV = $43,645,599
B)Yes, NPV = $43,798,975
C)Yes, NPV = $44,364,538
D)No, NPV is negative
Q2) What is the principal inflow and what is the principal outflow from a bond refunding situation?
Q3) When considering bond refunding, all of the following are important input items EXCEPT:
A)interest payments of old issue
B)weighted cost of capital
C)interest payments of new issue
D)after-tax cost of debt
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Page 26
Chapter 21: Risk Management
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Q1) Which of the following is the current price in a futures contract?
A)volatile price
B)spot price
C)short price
D)long price
Q2) All of the following are reasons to reduce financial distress EXCEPT:
A)enhanced debt capacity.
B)reduced WACC.
C)better currency exchange ratio.
D)ensure adequate cash flows.
Q3) Marking to market is a procedure for contracts.
A)futures
B)forwards
C)margin
D)implied
Q4) A futures contract is a(n) contract.
A)implied
B)negotiated
C)standardized
D)variable
Page 27
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Chapter 22: International Financial Management
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Q1) If the annual nominal interest rate on 5-year U.S.Government Treasury bonds is 7 percent, and the annual nominal interest rate on 5-year Canadian bonds is 5.5 percent, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S.dollars and Canadian dollars is $0.587?
A)$0.595
B)$0.547
C)$0.578
D)$0.630
Q2) A parent company's foreign investment risk exposure depends on the foreign subsidiary's net position.
A)cash
B)equity
C)present value
D)working capital
Q3) Basic hedging techniques include all of the following except
A)money market hedge
B)forward market hedge
C)primary market hedge
D)none, because all are basic hedging techniques
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Page 28
Chapter 23: Corporate Restructuring
Available Study Resources on Quizplus for this Chatper
75 Verified Questions
75 Flashcards
Source URL: https://quizplus.com/quiz/22897
Sample Questions
Q1) Explain the difference between a stock purchase and an asset purchase in a merger transaction.Which is preferred and why?
Q2) What are the total assets and stockholders' equity (in $ millions) if the purchase method is used as the accounting method for this merger?
A)$130, $63
B)$130, $67
C)$132, $65
D)$132, $67
Q3) A reorganization plan is reviewed by the for fairness and feasibility.
A)bankruptcy court
B)Securities and Exchange Commission
C)Federal Trade Commission
D)bankruptcy court and the SEC
Q4) Legal bankruptcy proceedings focus on the decision of whether or not the firm's value as a going concern is greater than its
A)liquidation value
B)market value
C)equity value
D)historical value
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