Financial Decision Making Test
Preparation
Course Introduction
Financial Decision Making explores the principles and practices involved in making informed financial choices within organizations and for individual investors. The course covers topics such as time value of money, risk and return analysis, capital budgeting, financial statement analysis, and sources of financing. Emphasis is placed on applying quantitative and qualitative tools to assess alternative courses of action, integrating ethical considerations, and developing strategies to optimize financial performance. Students gain a practical understanding of how financial decisions impact organizational objectives and learn to use analytical frameworks to solve real-world financial challenges.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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21 Chapters
2224 Verified Questions
2224 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) There are some serious problems with the financial goal of maximizing the earnings of the firm.
A)True
B)False
Answer: True
Q2) Proper risk-return management means that
A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.
Answer: B
Q3) The primary market includes the sale of securities by way of initial public offerings.
A)True
B)False
Answer: True
Q4) Timing is not a particularly important consideration in financial decisions. A)True
B)False
Answer: False
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) The primary disadvantage of accrual accounting is that
A) it does not match revenues and expenses in the period in which they are incurred.
B) it does not appropriately measure accounting profit.
C) it does not recognize accounts receivable.
D) it does not adequately show the actual cash flows of the firm.
Answer: D
Q2) Which of the following is an inflow of cash?
A) Funds spent in normal business operations
B) The purchase of a new factory
C) The sale of the firm's bonds
D) The retirement of the firm's bonds
Answer: C
Q3) Book value per share of stock is of greater concern to the financial manager than market value per share of stock.
A)True
B)False
Answer: False
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4
Chapter 3: Financial Analysis
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89 Flashcards
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Sample Questions
Q1) To compute the quick ratio, accounts receivable are not included in current assets.
A)True
B)False
Answer: False
Q2) LIFO and FIFO are two ways that companies following the generally accepted accounting principles value their inventory. One method may be preferred over the other during inflationary time periods, which results in different profits, even though both methods are legal to use.
A)True
B)False
Answer: True
Q3) Disinflation may cause
A) an increase in the value of gold, silver, and gems.
B) a reduced required return demanded by investors on financial assets.
C) additional profits through falling inventory costs.
D) None of the options are true.
Answer: B
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Page 5
Chapter 4: Financial Forecasting
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88 Flashcards
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Sample Questions
Q1) A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO?
A) $2,750
B) $3,600
C) $3,300
D) $3,850
Q2) The need for an increase or decrease in short-term borrowing can be predicted by A) ratio analysis.
B) trend analysis.
C) a cash budget.
D) an income statement.
Q3) If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March, where 80% of sales are on credit, 20% are collected in the month of sale, and 80% are collected the month after, what are the cash receipts in March?
A) $20,000
B) $16,000
C) $21,400
D) $10,300
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Page 6
Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) If a firm has a sales price per unit of $6.00, a variable cost per unit of $4.00, and a break-even point of 40,000 units, fixed costs are equal to _____.
A) $27,000
B) $90,000
C) $80,000
D) $50,000
Q2) If fixed costs rise while other variables stay constant
A) the break-even point rises.
B) the degree of operating leverage increases.
C) total profit declines.
D) All of the options are true.
Q3) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
Q4) The lower a firm's break-even point, the lower amount of quantity needs to be sold in order to reach a profit of zero.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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119 Flashcards
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Sample Questions
Q1) When a company sells more than it produces, its inventory levels increase.
A)True
B)False
Q2) If we examine the ratio of working capital to sales, we can see that for the last several decades, firms' liquidity has been increasing.
A)True
B)False
Q3) The term "permanent current assets" implies
A) the same thing as fixed assets.
B) nonmarketable assets.
C) some minimum level of current assets that are not self-liquidating.
D) inventory.
Q4) Retail companies like Target and Macy's exhibit sales patterns that are most typically influenced by
A) cyclical economic indicators.
B) competitive prices.
C) seasonality.
D) sales promotions.
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Chapter 7: Current Asset Management
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138 Verified Questions
138 Flashcards
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Sample Questions
Q1) Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit, and desires to keep 100 units in safety stock. Assuming level production, what should be its average inventory?
A) 200-300
B) 301-400
C) 401-500
D) 501-600
Q2) Eurodollars are U.S. dollars held on deposit by foreign banks.
A)True
B)False
Q3) Dun & Bradstreet is known for providing
A) interest rate information to cash managers.
B) credit scoring reports that rank a company's payment habits relative to its peer group.
C) cash management systems to corporate treasurers.
D) consumer credit reports to credit card companies.
Q4) "Float" is the name given for a short-term loan between suppliers and buyers.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) LIBOR is
A) a resource used in production.
B) an interest rate paid on Eurodollar loans in the London market.
C) an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks.
D) the interest rate paid by the British government on its long-term bonds.
Q2) The biggest categories of asset-backed securities are the home equity loans, automobile receivables, and credit card receivables.
A)True
B)False
Q3) Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the accounts receivable to the buyer.
A)True
B)False
Q4) Companies to can hedging to eliminate all or some foreign currency risk.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.
A)True
B)False
Q2) A major disadvantage to time value of money is that is only considers one item that changes the value of the dollar such as interest.
A)True
B)False
Q3) The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 today worth less than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) All of these options are true.
Q4) The future value is the same concept as the way money grows in a bank account.
A)True B)False
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Chapter 10: Valuation and Rates of Return
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105 Flashcards
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Sample Questions
Q1) The coupon rate or required return of bonds is equal to the stated rate on the bond's contract.
A)True
B)False
Q2) If a company's stock price (P<sub>0</sub>) goes up, and nothing else changes, K<sub>e</sub>(the required rate of return) should A) go up.
B) go down.
C) remain unchanged.
D) More information is needed for an answer.
Q3) A 10-year bond pays 5% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis.
A) $693.25
B) $386.00
C) $3,390.85
D) $1,386.09
Q4) The variable growth model is most useful for firms in emerging industries.
A)True
B)False
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Chapter 11: Cost of Capital
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102 Flashcards
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Sample Questions
Q1) The weighted average cost of capital calculates the average cost of issued or new issuance of debt and equity for a firm.
A)True
B)False
Q2) Most firms are able to use ______% debt in their capital structure without exceeding norms acceptable to creditors and investors.
A) 30-50
B) 40-60
C) 50-70
D) 60-80
Q3) The slope of the security market line (SML) will often increase when the economy is in a boom period.
A)True
B)False
Q4) K<sub>e</sub> represents an expected return to stockholders as well as a cost to the firm.
A)True
B)False
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Page 13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the net present value of project A?
A) $25,930
B) $14,520
C) $11,589
D) $19,230
Q2) For a small business, it is possible for the purchase price of an asset to be expensed rather than depreciated.
A)True
B)False
Q3) A rapid payback may be important to firms having rapid technological development.
A)True
B)False
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The "portfolio effect" in capital budgeting refers to
A) the relationship of stocks to bonds.
B) the degree of correlation between various investments.
C) the coefficient of variation.
D) the risk-adjusted discount rate.
Q2) A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25%, respectively. What is the expected value of these outcomes
A) $362.5
B) $89.4
C) $94.5
D) $178.3
Q3) The coefficient of correlation
A) takes on values anywhere from 0 to +1.
B) takes on values anywhere from -1 to 0.
C) takes on values anywhere from -1 to +1
D) takes on values of 0 or larger.
Q4) Risk is not only measured in terms of losses, but also in terms of variability.
A)True
B)False
Page 15
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Chapter 14: Capital Markets
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Sample Questions
Q1) The 1994 North American Free Trade Agreement was established between the U.S., Canada, and Mexico which helped
A) reduce trade barriers.
B) allow trade to happen between these countries.
C) lower the amount of illegal trading.
D) all of the answers are correct.
Q2) The emergence of trading via ECNs has A) provided a unique advantage not offered by the NYSE.
B) lowered the cost of trading.
C) made trading more difficult for insider traders.
D) all of these options are true.
Q3) A key variable of market efficiency is the certainty of the income stream. The most efficient market is for corporate securities.
The most efficient market is for U.S. securities, particularly the short-term U.S. Treasury Bill.
A)True
B)False
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Chapter 15: Investment Banking
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Sample Questions
Q1) Shelf registration
A) allows firms to file with the SEC 20 days before the issue date.
B) is advantageous primarily to smaller investment banking firms.
C) allows firms to issue securities faster when market conditions are more favorable.
D) more than one of the options are true.
Q2) An investment banker acts as a middleman between a corporation needing funds and investors with funds.
A)True
B)False
Q3) In a public distribution, the dealer group will generally pay a
A) higher price for the stock than the public.
B) lower price for the stock than the managing investment banker.
C) higher price for the stock than the managing investment banker.
D) lower price for the stock than members of the investment banking syndicate group.
Q4) The entire area of investment banking is becoming more competitive.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Investors consider which of the following to be the most important measure of bond returns?
A) The coupon rate
B) The yield to maturity
C) The current yield
D) None of these options
Q2) The lessee is the one making the rental payments, while the lessor is the one receiving the rental payments.
A)True
B)False
Q3) Debentures are commonly issued by small companies. Since debentures are unsecured, investors look to the good faith and credit of the issuing corporation, therefore larger firms with high recognition are more likely to issue debentures.
A)True
B)False
Q4) The value of bonds will move in the opposite direction from the market interest rates.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Which of the following best represents a benefit of a rights offering for a company?
A) Rights offerings increase return on equity.
B) Rights offerings substantiate higher debt-to-equity ratios.
C) Rights offerings have lower margin requirements.
D) None of these options are true
Q2) Preferred stock may be good for a company because it
A) expands the capital base of the firm without diluting the common stock ownership.
B) does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.
C) is not as costly as common stock or bonds.
D) has no future negative ramifications when dividend payments are missed
Q3) Each common stockholder has the ability to vote, and may assign a proxy if they desire to pass the voting right along.
A)True
B)False
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) CBA Inc has 400,000 shares outstanding with a $5 par value. The shares were issued for $12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%. What will be the "common stock" account after the stock dividend?
A) $2,816,000
B) $2,120,000
C) $3,496,000
D) $2,000,000
Q2) Dividends may be relevant to distribute because they help resolve uncertainty about the firm and its future.
A)True
B)False
Q3) Which of the following does not affect a company's dividend policy?
A) Legal rules concerning capital impairment
B) The efficient market hypothesis
C) Access to capital markets
D) The tax position of shareholders
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) Basic earnings per share includes all convertible bonds outstanding.
A)True
B)False
Q2) A pure bond value is the vale of a non-convertible bond with the same amount of risk as the convertible bond being measured.
A)True
B)False
Q3) Theoretically, stock options are granted to employees so that the employees will make decisions that benefit the owners or shareholders.
A)True
B)False
Q4) A convertible bond is currently selling for $1,125. It is convertible into 20 shares of common stock that presently sell for $40 per share. The conversion premium is A) $325.
B) $800.
C) 66.74 shares.
D) 23.8 shares.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Leveraged buyouts are restricted to "outside" tender offers.
A)True
B)False
Q2) It is possible to merge with a company so that the merger results in the same earnings per share but still lowers the new firm's cost of capital.
A)True
B)False
Q3) Most mergers are horizontal in nature in order to avoid the potential antitrust complications involved with the elimination of competition.
A)True
B)False
Q4) Goodwill is created when the purchasing firm pays more than what the acquired firm is worth.
A)True
B)False
Q5) A motive for selling stockholders may be the bias against smaller companies.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) Which of the following statements about the International Finance Corporation (IFC) is false?
A) The decision to assist a venture depends on both the profitability of the project and the potential benefit to the host country's economy.
B) The IFC assumes no managerial responsibility and exercises no voting rights.
C) The IFC may either buy equity shares or provide long-term loans.
D) All of these options are true.
Q2) In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate.
A)True
B)False
Q3) Assume that you had U.S. dollar quotes for the Japanese yen and the British pound. If you want to know the yen/pound exchange rate, you would rely on A) forward rates.
B) cross rates.
C) The Wall Street Journal.
D) hedge ratios.
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