Course Introduction
Financial Decision Making
Test Questions
Financial Decision Making introduces students to the essential concepts and tools necessary for making effective financial decisions in both personal and organizational contexts. The course covers topics such as time value of money, risk and return analysis, capital budgeting, financial statement analysis, and sources of financing. Students will learn how to evaluate investment opportunities, assess financial performance, and apply quantitative techniques to solve real-world financial problems. Through case studies and practical examples, the course aims to develop analytical thinking and sound judgement, equipping students with the skills to make informed and strategic financial decisions.
Recommended Textbook
Corporate Finance The Core 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following is/are an advantage of incorporation?
A)Access to capital markets
B)Limited liability
C)Unlimited life
D)All of the above
Answer: D
Q2) How much would you have to pay to purchase 100 shares of XYZ stock on November 18th?
A)$2520
B)$2525
C)$2593
D)$2600
Answer: D
Q3) Which of the following organization forms for a business does NOT avoid double taxation?
A)Limited partnership
B)"C" corporation
C)"S" corporation
D)Limited liability company
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Calculate Luther's return of equity (ROE),return of assets (ROA),and price-to-earnings ratio (P/E)for the year ending December 31,2008.
Answer: ROE = NI/shareholder equity = 10.2/63.6 = .160 or 16.0% ROA = NI/total assets Here total assets are not given,but we know that Total Assets = Total Liabilities + Shareholder Equity,so ROA = 10.2/386.7 = .026 or 2.6% P/E = price/EPS or Market Cap/NI = (8.0 × $15)/$10.2 = 11.8
Q2) U.S.public companies are required to file their annual financial statements with the U.S.Securities and Exchange Commission on which form?
A)10-A
B)10-K
C)10-Q
D)10-SEC
Answer: B
Q3) Accounts payable is a:
A)long-term liability.
B)current asset.
C)long-term asset.
D)current liability.
Answer: D
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) A McDonald's Big Mac value meal consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the law of one price?
A)$4.08
B)$4.38
C)$5.47
D)$5.77
Answer: C
Q2) Assuming that the film maker issues the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?
A)$1.7 million; Yes
B)$1.7 million; No
C)$2.7 million; Yes
D)$2.7 million; No
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Q1) You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:
A)$2585
B)$660
C)$2535
D)$1390
Q2) The amount of money that your great aunt Matilda originally put in the account is closest to:
A)$600
B)$800
C)$1000
D)$1200
Q3) Which of the following statements is FALSE?
A)The process of moving a value or cash flow forward in time is known as compounding.
B)The effect of earning interest on interest is known as compound interest.
C)It is only possible to compare or combine values at the same point in time.
D)A dollar in the future is worth more than a dollar today.
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Page 6
Chapter 5: Interest Rates
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Q1) Which of the following statements is FALSE?
A)The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.
B)The equivalent after-tax interest rate is r(1 - ).
C)The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.
D)To compensate for the risk that they will receive less than promised if the firm defaults,investors demand a lower interest rate than the rate on U.S.Treasuries.
Q2) You are offered an investment that offers and effective annual rate of 8%.If this investment offers continuous compounding,then the APR for this investment is closest to:
A)7.70%
B)8.00%
C)8.25%
D)8.33%
Q3) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q4) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Valuing Bonds
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Q1) The credit spread on B-rated corporate bonds is:
A)1.0%
B)1.5%
C)2.6%
D)4.1%
Q2) Consider a zero coupon bond with 20 years to maturity.The price will this bond trade if the YTM is 6% is closest to:
A)$215
B)$312
C)$335
D)$306
Q3) Forward interest rates:
A)accurately predict future spots rates because of the law of one price.
B)tend not to be good predictors of future spot rates.
C)tend to be biased downward as predictors of future spot rates when the yield curve is upward sloping.
D)tend to be biased upward as predictors of future spot rates when the yield curve is downward sloping.
Q4) What is the relationship between a bond's price and its yield to maturity?
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Chapter 7: Investment Decision Rules
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Q1) The internal rate of return (IRR)for project Beta is closest to:
A)25.0%
B)22.7%
C)24.5%
D)22.2%
Q2) Assume that projects A and B are mutually exclusive.The correct investment decision and the best rational for that decision is to:
A)invest in project A since NPV<sub>B</sub> < NPV<sub>A.</sub>
B)invest in project B since IRR<sub>B</sub> > IRR<sub>A</sub>.
C)invest in project B since NPV<sub>B</sub> > NPV<sub>A.</sub> D)invest in project A since NPV<sub>A</sub> > 0.
Q3) The payback period for Rearden's mining operation is closest to:
A)5.00 years
B)6.00 years
C)6.25 years
D)6.50 years
Q4) If your new strip mall will have 16,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q5) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) Which of the following statements is FALSE?
A)Depreciation expenses have a positive impact on free cash flow.
B)Free Cash Flow = (Revenues - Costs - Depreciation)× (1 - <sub>c</sub>)- Capital Expenditures - NWC + <sub>c</sub> × Depreciation.
C)The firm cannot use its earnings to buy goods,pay employees,fund new investments,or pay dividends to shareholders.
D)The depreciation tax shield is the tax savings that results from the ability to deduct depreciation.
Q2) The NPV for the trucking division is closest to:
A)170,750
B)200,000
C)212,550
D)250,000
E)312,500
Q3) The change in Net working capital from year one to year two is closest to:
A)A decrease of $360
B)An increase of $360
C)An increase of $396
D)A decrease of $396
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Page 10
Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A)The more cash the firm uses to repurchase shares,the less it has available to pay dividends.
B)Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered.
C)We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow.
D)We can interpret the enterprise value as the net cost of acquiring the firm's equity,taking its cash and paying off all debts.
Q2) Which of the following statements is FALSE?
A)Estimating dividends,especially for the distant future,is difficult.
B)A firm can only pay out its earnings to investors or reinvest their earnings.
C)Successful young firms often have high initial earnings growth rates.
D)According to the constant dividend growth model,the value of the firm depends on the current dividend level,divided by the equity cost of capital plus the growth rate.
Q3) Calculate the enterprise value for DM Corporation.
Q4) What are some common multiples used to value stocks?
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11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Which of the following statements is FALSE?
A)The variance increases with the magnitude of the deviations from the mean.
B)The variance is the expected squared deviation from the mean.
C)Two common measures of the risk of a probability distribution are its variance and standard deviation.
D)If the return is riskless and never deviates from its mean,the variance is equal to one.
Q2) The standard deviation of the returns on the Index from 2000 to 2009 is closest to:
A)19.5%
B)20.5%
C)3.8%
D)8.8%
Q3) Which of the following statements is TRUE?
A)Small stocks have outperformed the S&P 500 in every year since 1925.
B)The S&P 500 is more volatile than corporate bonds.
C)Corporate bonds underperformed inflation during most years since 1925.
D)Treasury Bills outperformed inflation during every year since 1925.
Q4) What is the market portfolio?
Q5) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Abbott Labs in your portfolio after one year is closest to:
A)-10.0%
B)43.5%
C)45.0%
D)50.0%
Q2) The beta for Wyatt Oil is closest to:
A)0.75
B)0.80
C)1.00
D)1.10
Q3) Consider an equally weighted portfolio that contains 100 stocks.If the average volatility of these stocks is 50% and the average correlation between the stocks is .7,then the volatility of this equally weighted portfolio is closest to: A).72
B).63
C).40
D).50
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Chapter 12: Estimating the Cost of Capital
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Q1) Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during average economic times is closest to:
A)3.50%
B)3.75%
C)4.00%
D)5.50%
Q2) Which of the following is true of asset betas?
A)Asset betas are expected to vary greatly within firms in the same industry.
B)Businesses that are less sensitive to market and economic conditions tend to have higher asset betas than more cyclical industries.
C)Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries.
D)A and B are correct.
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) The alpha for the informed investors is closest to:
A)-2.4%
B)-0.9%
C)0.0%
D)3.6%
Q2) The market value for Chihuahua is closest to:
A)$10.0 million
B)$12.5 million
C)$12.0 million
D)$15 million
Q3) An individual's desire for intense risk-taking experiences is known as:
A)phenomenon seeking.
B)herd seeking.
C)sensation seeking.
D)rational expectations seeking.
Q4) The amount of money that Galt's fund will have under management is closest to:
A)$500 million
B)$600 million
C)$1000 million
D)$1250 million
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Two separate firms are considering investing in this project.Firm unlevered plans to fund the entire $80,000 investment using equity,while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.
Q2) At the conclusion of this transaction,the number of shares that d'Anconia Copper will repurchase is closest to:
A)5 million
B)15 million
C)20 million
D)40 million
Q3) What is a market value balance sheet and how does it differ from a book value balance sheet?
Q4) The unlevered beta for Blinkin is closest to:
A)0.95
B)1.10
C)1.00
D)0.90
Q5) What is the conservation of value principle?
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Chapter 15: Debt and Taxes
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Q1) Taggart Transcontinental currently has no debt and an equity cost of capital of 16%.Suppose that Taggart decides to increase its leverage and maintain a market debt-to-value ratio of 1/3.Suppose Taggart's debt cost of capital is 9% and its corporate tax rate is 35%.Assuming that Taggart's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:
A)12.9%
B)13.0%
C)15.0%
D)16.0%
Q2) If Flagstaff currently maintains a .5 debt to equity ratio,then Flagstaff's after-tax WACC is closest to:
A)10.00%
B)10.25%
C)9.50%
D)8.75%
Q3) If Flagstaff currently maintains a .8 debt to equity ratio,then calculate the value of Flagstaff's interest tax shield.
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs.If the price of BBB's stock rises to $10.85 per share following the announcement,then the present value of BBB's financial distress costs is closest to:
A)$21.25 million
B)$35.00 million
C)$11.40 million
D)$13.75 million
Q2) Which of the following projects should Nielson Motors accept?
A)1 only
B)1,2,and 3 only
C)1 and 4 only
D)2,3,and 5 only
Q3) Which of the following is NOT an indirect cost of bankruptcy?
A)Legal fees
B)Delayed liquidation
C)Costs to creditors
D)Loss of customers
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Assume that Rockwood is able to repurchase shares prior to the market becoming aware of the new information regarding Rockwood's true value.After the repurchase,and following the release of the new information regarding the true value of Rockwood,the firm's share price is closest to:
A)$30.00
B)$31.50
C)$28.75
D)$30.60
Q2) Assume that Omicron uses the entire $50 million to repurchase shares.The amount of the regular yearly dividends in the future is closest to:
A)$9.00
B)$5.00
C)$4.50
D)$4.00
Q3) The effective tax disadvantage for retaining cash in 2006 is closest to:
A)14.75%
B)12.50%
C)35.00%
D)15.00%
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following statements is FALSE?
A)To determine the project's debt capacity for the interest tax shield calculation,we need to know the value of the project.
B)To compute the present value of the interest tax shield,we need to determine the appropriate cost of capital.
C)Because we don't value the tax shield separately,with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method.
D)A target leverage ratio means that the firm adjusts its debt proportionally to the project's value or its cash flows.
Q2) The NPV of this project using the WACC method is closest to:
A)$10 million
B)$13 million
C)$42 million
D)$71 million
Q3) Given that Rose issues new debt of $50 million initially to fund the acquisition,the total value of this acquisition using the APV method is equal to?
Q4) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
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Page 20
Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) What is the purpose of the sensitivity analysis?
Q2) Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2009?
A)1505 units
B)1115 units
C)1323 units
D)1702 units
Q3) The amount of net working capital for Ideko in 2007 is closest to:
A)$30,510
B)$26,420
C)$22,170
D)$35,195
Q4) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation equity value of Ideko in 2010 is closest to:
A)$181.7 million
B)$272.8 million
C)$152.8 million
D)$301.7 million
21
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