Financial Decision Making
Test Bank
Course Introduction
Financial Decision Making explores the analytical frameworks and practical tools necessary for making sound financial choices in both personal and organizational contexts. This course examines foundational concepts such as time value of money, risk and return, capital budgeting, financial statement analysis, and funding strategies. Students will learn to interpret financial data, assess investment opportunities, and apply quantitative techniques to real-world scenarios, fostering an understanding of how financial decisions impact overall business performance and long-term strategy.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following statements is correct?
A)All types of business formations have limited lives.
B)Partnerships are the most complicated type of business to form.
C)Both sole proprietorships and partnerships are taxed in a similar fashion.
D)Both partnerships and corporations have limited liability for general partners and shareholders.
E)Both partnerships and corporations incur double taxation.
Answer: C
Q2) The rules by which corporations govern themselves are called:
A)indenture provisions.
B)indemnity provisions.
C)bylaws.
D)charter agreements.
E)articles of incorporation.
Answer: C
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
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Chapter 2: Financial Statements and Cash Flow
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Q1) Which one of the following accounts is generally the most liquid?
A)Patent
B)Building
C)Accounts receivable
D)Equipment
E)Inventory
Answer: C
Q2) Free cash flow is:
A)without cost to the firm.
B)equal to net income plus taxes.
C)a term used to describe an increase in net working capital.
D)cash that is available to distribute to creditors and equity holders.
E)another term for operating cash flow.
Answer: D
Q3) Identify three cash flows that occur between a firm and its stockholders.Indicate the direction of the cash flow in each case.
Answer: The three cash flows are:
1)Sale of equity securities:Cash inflow to the firm
2)Repurchase of outstanding securities:Cash outflow from the firm
3)Dividends paid:Cash outflow from the firm
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Chapter 3: Financial Statements Analysis and Financial Models
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Q1) A firm has sales of $2,400,net income of $125,total assets of $1,100,and total equity of $750.Interest expense is $200.What is the common-size statement value of the interest expense?
A)13.33%
B)7.10%
C)8.33%
D)18.18%
E)26.67%
Answer: C
Q2) Which one of these is the formula for computing enterprise value?
A)Price per share × Shares outstanding - Cash
B)Market capitalization + Market value of interest bearing debt - Cash
C)Market capitalization - Market value of interest bearing debt
D)Price per share × Shares outstanding
E)Market capitalization + Market value of all debt - Cash
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Q1) Which of the following will increase the effective annual rate (EAR)of a loan?
A)Decreasing the frequency of the interest rate compounding
B)Applying only simple interest
C)Decreasing the annual percentage rate (APR)
D)Increasing either the annual percentage rate (APR)or the compounding frequency
E)Changing from continuous compounding to daily compounding of interest
Q2) You are comparing two investments,A and B,with unequal annual cash flows and varying numbers of years.Which one of these statements is correct regarding this comparison?
A)If A has a higher present value at one discount rate,then A will have the higher present value at any other discount rate.
B)If B has a higher present value,then B will have the higher future value at any point in time,given a stated discount rate.
C)If B has a higher future value at one discount rate,then B will have the higher present value at any discount rate.
D)The two projects cannot be compared since they are of varying lengths.
E)The project with the greatest number of years will have the higher present value.
Q3) What circumstances are required for an APR to equal an EAR?
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6
Chapter 5: Interest Rates and Bond Valuation
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Q1) A deferred call provision is designed to:
A)guarantee a bond will be repaid on a certain date prior to maturity.
B)prohibit the calling of a bond prior to a certain date.
C)ensure bond holders receive full value when a bond is called.
D)ensure any bankruptcy of the issuer is deferred until a bond is repaid in full.
E)ensure the owner of a bond agrees to the call before a bond is called.
Q2) Which one of these definitions is correct?
A)Negative covenant: a "thou shalt" agreement within an indenture
B)Premium bond: bond that sells for less than face value
C)Dirty price: market price,excluding accrued interest
D)Call provision: issuer's right to repurchase a bond prior to maturity
E)Unfunded debt: long-term corporate debt
Q3) Which one of these is included in the term structure of interest rates and remains constant over the term?
A)Default risk premium
B)Interest rate risk premium
C)Liquidity premium
D)Real rate of interest
E)Inflation premium
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Chapter 6: Stock Valuation
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Q1) Theo owns 13,400 of the 85,000 outstanding shares of BBE Inc.The shares sell for $22.40.Each share is granted one vote for each open seat on the board of directors.Currently,there are three open seats.Theo wants to be on the board and is assuming that no one,other than himself,will vote for him.How much additional money,if any,must he invest in BBE to guarantee his election if the firm uses a straight voting system?
A)$0
B)$413,862.40
C)$175,862.40
D)$651,862.40
E)$525,862.40
Q2) Shares of a common stock offer an expected total return of 12 percent.What is the dividend yield if the dividend increases by 3 percent annually?
A)15.00%
B)3.00%
C)9.00%
D)8.74%
E)15.36%
Q3) Contrast some of the features of preferred stock versus common stock.
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Q1) Nadine always makes the final accept/reject decision for proposed projects for ARK International.Her final decision is always based on NPV.Why then does she insist that any proposed project that comes to her desk include an analysis of the project's NPV,IRR,PI,payback,and discounted payback?
Q2) All else equal,the payback period for a project will decrease whenever the: A)duration of a project is lengthened.
B)cash inflows are moved earlier in time.
C)assigned discount rate decreases.
D)required return for a project increases.
E)initial cost increases.
Q3) A project is expected to have annual cash flows of $22,400,$13,600 and -$4,200 for Years 1 to 3,respectively.The initial cash outlay is $27,500 and the discount rate is 12 percent.What is the modified IRR?
A)13.12%
B)13.22%
C)2.73%
D)8.67%
E)9.75%
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Chapter 8: Making Capital Investment Decisions
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Q1) Lefty's just purchased some equipment that is classified as 7-year property for MACRS.The equipment cost $67,600.The MACRS table values are .1429,.2449,.1749,.1249,and .0893,for Years 1 to 5,respectively.What will the book value of this equipment be at the end of four years?
A)$21,118.24
B)$6,036.68
C)$7,040.00
D)$15,081.56
E)$8,443.24
Q2) Which one of the following will decrease a firm's net working capital?
A)A decrease in fixed assets
B)An increase in inventory
C)An increase in the firm's checking account balance
D)A decrease in accounts payable
E)A decrease in accounts receivable
Q3) How does the decision-making process vary when considering two mutually exclusive purchases of equipment when the equipment will and will not be replaced at the end of its life?
Q4) Should financing costs be included as an incremental cash flow in capital budgeting analysis?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Which method best attempts to model all of the uncertainties of the real world?
A)Scenario analysis
B)Financial break-even analysis
C)Accounting break-even analysis
D)Sensitivity analysis
E)Monte Carlo simulation
Q2) Sensitivity analysis helps determine the:
A)range of possible outcomes given possible ranges for each variable.
B)degree to which the net present value reacts to changes in a single variable.
C)net present value given the best and the worst possible situations.
D)degree to which a firm is reliant upon multiple economic factors changing simultaneously.
E)ideal level of variable costs in relation to the fixed costs of a project.
Q3) All else constant,as the variable cost per unit increases,the:
A)net profit increases.
B)contribution margin decreases.
C)sensitivity to fixed costs decreases.
D)operating cash flow increases.
E)financial break-even point decreases.
Q4) Explain the significance of the financial break-even point.
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Chapter 10: Risk and Return Lessons From Market History
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Q1) Which one of the following values cannot be negative?
A)Capital gain,P<sub>t + 1</sub> - P<sub>t</sub>
B)Total dollar return
C)Holding period return
D)Dividend yield
E)Total return,R<sub>t + 1</sub>
Q2) One year ago,Barkley's stock sold for $20 a share.During last year,Barkley's paid $1.40 per share in dividends and saw its stock price increase by five percent for the year.Today,the firm announced that it will pay $1.43 per share in dividends this year.What do you know with certainty about the performance of Barkley's stock for this year?
A)The total rate of return will be higher this year than it was last year.
B)The dividend yield for this year will be higher than it was last year.
C)The capital gains yield will be positive.
D)The dividend yield for this year will be lower than it was last year.
E)The total rate of return will be lower this year than it was last year.
Q3) How does the payment of a dividend affect the total return on a stock?
Q4) What is the difference between an arithmetic and a geometric average? Is one preferred over the other?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Q1) Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
B)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
C)Standard deviation measures only the systematic risk of a portfolio.
D)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
E)The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.
Q2) Which one of the following is an example of a nondiversifiable risk?
A)A poorly managed firm suddenly goes out of business due to lack of sales
B)A well managed firm reduces its work force and automates several jobs
C)A key employee of a firm suddenly resigns and accepts employment with a key competitor
D)A well respected chairman of the Federal Reserve suddenly resigns
E)A well respected president of a firm suddenly resigns
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Chapter 12: Risk, Cost of Capital, and Valuation
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Q1) Asian Foods needs $65,000 for a new project.The firm has a target capital structure of 25 percent debt and 75 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?
A)$70,801.25
B)$76,211.17
C)$71,369.75
D)$69,497.79
E)$59,674.09
Q2) Firms A and B are identical except for their capital structures.Firm A is an all-equity firm while Firm B is levered.Given this,you can assume that Firm B's equity beta will be ______ Firm A's beta and its debt beta will be:
A)greater than;equal to zero.
B)greater than;equal to one.
C)equal to;equal to the market beta.
D)less than: equal to zero.
E)less than;equal to one.
Q3) Explain the logic that underpins the statement: "The discount rate of a project should be the expected return on a financial asset of comparable risk."
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14
Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) The abnormal return in an event study is described as the:
A)actual return on a security minus the market rate of return on the same date.
B)total return earned by a security on the date of an announcement affecting that security.
C)total return earned on a security for the 7-day period commencing three days prior to an announcement affecting that security.
D)change in market value of a security on the day of an announcement affecting that security.
E)any change in the market price of a security that exceeds five percent over a 7-day period.
Q2) The efficient market hypothesis supports which one of these statements?
A)Market prices do not reflect the underlying value of securities.
B)Managers can profitably speculate in foreign currency.
C)Financial managers can time stock and bond sales.
D)Managers cannot boost stock prices through creative accounting.
E)Market prices are uncaused.
Q3) Explain why in an efficient market investments have an expected net present value (NPV)of zero.
Q4) Define the three forms of market efficiency.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) The Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share.The current cost of equity is 12 percent and the tax rate is 34 percent.The firm is considering adding $1.25 million of debt with a coupon rate of 8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?
A)$2,535,000
B)$5,035,000
C)$3,785,000
D)$3,015,000
E)$4,015,000
Q2) Identify and explain the Modigliani-Miller proposition that supports the concept that adding debt to a firm's capital structure increases the value of that firm.
Q3) A firm's capital structure refers to the:
A)division of a firm's assets into current and fixed assets.
B)amount shareholders have invested into the firm.
C)types of fixed assets owned by the firm.
D)mix of debt and equity used to finance the firm's assets.
E)amount of cash and cash equivalents held by a firm.
Q4) Explain homemade leverage and why it matters.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) Which one of these statements most applies to a firm that is suffering from financial distress?
A)Bondholders will desire high risk projects in order to protect their investment.
B)Stockholders will increase their investment in the firm to protect their current investment.
C)Stockholders will generally prefer low-risk over high-risk projects.
D)Managers will tend to lower dividends in an effort to protect shareholder value.
E)Stockholders will bear the cost of selfish investment strategies through higher interest payments.
Q2) The explicit costs,such as the legal expenses,associated with corporate default are classified as _____ costs.
A)unlevered
B)beta conversion
C)direct bankruptcy
D)indirect bankruptcy
E)flotation
Q3) How might business risk affect the capital structure of a firm?
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Chapter 16: Dividends and Other Payouts
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Q1) New Built wants to repurchase 20,000 shares at $21 a share through a tender offer.Shareholders responded by offering 26,500 shares at $21 a share.Assume you are a shareholder and offered your 300 shares as part of the shareholder response.How many of your shares should you expect New Built to purchase?
A)0 shares
B)300 shares
C)398 shares
D)226 shares
E)251 shares
Q2) Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
A)distributions.
B)interest payments.
C)share repurchases.
D)payments-in-kind.
E)stock splits.
Q3) Summarize at least four key points that are known about dividends and share repurchases.
Q4) Identify at least four pros of paying dividends.
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Chapter 17: Options and Corporate Finance
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Q1) Which of the following statements are correct concerning option values,all else held constant?
I.The value of an in-the-money call increases as the price of the underlying stock increases.
II.The value of a call decreases as the exercise price increases.
III.The value of an in-the-money put increases as the price of the underlying stock increases.
IV.The value of a put decreases as the exercise price increases.
A)I and III only
B)II and IV only
C)I and II only
D)II and III only
E)I,II,and IV only
Q2) The effect on an option's value of a small change in the value of the underlying asset is called the option:
A)vega.
B)theta.
C)rho.
D)gamma.
E)delta.
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Chapter 18: Short-Term Finance and Planning
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Q1) Upstate Farms factors its accounts receivable immediately at a 3 percent discount.The average collection period is 42 days.Assume all accounts are collected in full.What is the effective annual interest rate on this arrangement?
A)29.97%
B)30.30%
C)30.78%
D)30.90%
E)31.33%
Q2) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
Q3) If you delay paying your suppliers by an additional ten days,then:
A)you will require less bank financing of your operations.
B)your stock-out costs will rise.
C)the cash cycle will increase by ten days.
D)your operating cycle will lengthen by ten days.
E)your payables turnover rate will increase.
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Chapter 19: Raising Capital
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Q1) Wholesale Foods would like to sell 1,600 shares of stock using a Dutch auction.The bids received are as follows: Bidder A: 300 shares at $23;Bidder B: 500 shares at $22;Bidder C: 700 shares at $21;Bidder D: 900 shares at $20;and Bidder E: 200 shares at $18.Bidder D will be able to purchase _____ shares at a price per share of ____.
A)533;$20
B)600;$20
C)533;$23
D)553;$18
E)553;$23
Q2) Currently,you own 7 percent of the outstanding stock of Metals Unlimited.The firm has decided to issue additional shares of stock and has given you the first option to purchase 7 percent of those additional shares.Which one of the following will you be participating in if you opt to purchase the shares you have been offered?
A)Red herring offer
B)Rights offer
C)Private placement
D)IPO
E)General cash offer
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Page 21
Chapter 20: International Corporate Finance
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Q1) Triangle arbitrage:
I.is a profitable situation involving three separate currency exchange transactions.
II.helps keep the currency market in equilibrium.
III.opportunities can exist in either the spot or the forward market.
IV.only involves currencies other than the U.S.dollar.
A)I and IV only
B)II and III only
C)I,II,and III only
D)II,III,and IV only
E)I,II,III,and IV
Q2) Which one of these best expresses the value of one currency in terms of a second currency?
A)LIBOR
B)Exchange rate
C)Depository Rate
D)Arbitrage rate
E)Real rate
Q3) What role does triangle arbitrage play in the foreign exchange markets? What might limit the effectiveness of triangle arbitrage?
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) Low's has 12,000 shares of stock outstanding at a price per share of $16.40.Bert's has 21,000 shares outstanding at a price per share of $26.50.Bert's believes it can create $41,000 of synergy if it acquires Low's in an exchange of stock.What is the value of the combined firm following the merger? Assume both firms are all-equity financed.
A)$794,300
B)$597,500
C)$753,300
D)$400,700
E)$636,800
Q2) Dog Treats has 6,500 shares of stock outstanding at a market price per share of $11.FIDO has 15,000 shares outstanding that sell for $18 a share.By merging,$9,600 of synergy can be created.What would be the post-merger value of the combined firm if FIDO acquires Dog Treats in a stock acquisition valued at $75,000?
A)$341,500
B)$276,100
C)$156,100
D)$266,500
E)$351,100
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