Fundamentals of Financial Decision Making Exam
Bank
Course Introduction
Fundamentals of Financial Decision Making introduces students to the essential principles and tools required for effective financial planning and analysis. The course covers core topics such as time value of money, risk and return, budgeting, capital investment decisions, financial statement analysis, and the role of financial markets. Through practical examples and case studies, students learn how individuals and organizations make informed financial choices, allocate resources efficiently, and evaluate the implications of those decisions for long-term value creation. This foundational knowledge equips students with critical thinking skills for sound financial management in personal and professional contexts.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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Chapter 1: An Introduction to the Foundations of Financial Management
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Q1) A corporate financial manager trying to maximize shareholder value
A) is not concerned with ethics but rather with writing iron-clad contracts.
B) can safely ignore ethics as long as no laws are broken.
C) must behave ethically in order to stay out of jail.
D) is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust.
Answer: D
Q2) Advantages of the corporate form of business organization include
A) easier transfer of ownership.
B) double taxation.
C) minimal legal requirements.
D) none of the above
Answer: A
Q3) Investors generally don't like risk.Therefore,a typical investor
A) will not be induced to take on any risk.
B) will only take on the least risk possible.
C) will only take on additional risk if he expects to be compensated in the form of additional return.
D) will only accept a zero return if the risk is zero.
Answer: C
Page 3
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Chapter 2: The Financial Markets and Interest Rates
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Q1) What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014?
A) 8.3%
B) 6.5%
C) 6.10%
D) 7.00%
Answer: C
Q2) In a private placement,the securities are offered and sold to a limited number of investors.
A)True
B)False
Answer: True
Q3) Transactions in the futures markets involve current payments for goods which will be delivered at some future agreed upon date.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements and Cash Flows
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Q1) Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price.
A)True
B)False
Answer: True
Q2) Which of the following statements about International Financial Reporting Standards (IFRS)is NOT true?
A) IFRS sets out broad and general principles that accountants should follow when preparing financial statements.
B) IFRS leaves LESS room for discretion than GAAP does.
C) IFRS offers simplicity but also possibly more leeway for accounting malpractice than does GAAP.
D) In 2008, the Securities and Exchange Commission (SEC) announced its plan to convert U.S. companies from GAAP to IFRS.
Answer: B
Q3) The income statement describes the financial position of a firm on a given date.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) Based on the information in Table 4-3,the total asset turnover is
A) 2.10 times.
B) 2.42 times.
C) 2.87 times.
D) 3.25 times.
Q2) Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
A) times interest earned
B) net profit margin
C) operating return on assets
D) operating efficiency quotient
Q3) Based on the information in Table 4-2,the acid-test ratio is
A) 1.17.
B) 1.33.
C) 1.39.
D) 2.15.
Q4) Discuss five limitations to ratio analysis.
Q5) Why do differences in the accounting practices of firms limit the usefulness of financial ratios?
Q6) How could an analyst determine whether a company's ratio is good or bad?
Page 6
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Chapter 5: The Time Value of Money
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Q1) You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?
A) $1,276
B) $1,359
C) $1,462
D) $1,338
Q2) A zero coupon bond pays no annual coupon interest payments.When it matures at the end of 7.5 years it pays out $1,000.If investors wish to earn 2.35% per year on this bond investment,what is the current price of the bond? (Round to the nearest dollar.)
A) $533
B) $561
C) $875
D) $840
Q3) How does compound interest differ from simple interest?
Q4) Why does the future value of a given amount increase when interest is compounded nonannually as opposed to annually?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Q1) Decker Corp.common stock has a required return of 17.5% and a beta of 1.75.If the expected risk free return is 3%,what is the expected return for the market based on the CAPM?
A) 11.29%
B) 14.29%
C) 13.35%
D) 15.27%
Q2) Unique security risk can be eliminated from an investor's portfolio through diversification.
A)True
B)False
Q3) Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return.What is the expected percentage return this investment will produce?
A) 33.3%
B) 16.1%
C) 9.5%
D) 15.4%
Q4) How does opportunity cost affect an investor's required rate of return?
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Chapter 7: The Valuation and Characteristics of Bonds
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Q1) Why does a bond sell at a discount when the coupon rate is lower than the required rate of return and vice versa?
Q2) Explain the different types of value.
Q3) Which of the following affect an asset's value to an investor?
I.Amount of an asset's expected cash flow
II.The riskiness of the cash flows
III.Timing of an asset's cash flows
IV.Investor's required rate of return
A) I, II, III
B) I, III, IV
C) I, II, IV
D) I, II, III, IV
Q4) A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.
A)True
B)False
Q5) Long-term bonds have greater interest rate risk than shorter-term bonds.
A)True
B)False
Q6) What are the three important elements of asset valuation?
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Who bears the greatest risk of loss of value if a firm should fail?
A) bondholders
B) preferred stockholders
C) common stockholders
D) All of the above bear equal risk of loss.
Q2) Beaver Corporation stock is currently selling for $58.00.It is expected to pay a dividend of $5.00 at the end of the year.Dividends are expected to grow at a constant rate of 7.5% indefinitely.Compute the required rate of return on Beaver Corporation stock.
A) 12.48%
B) 15.65%
C) 13.64%
D) 16.12%
Q3) Preferred stock differs from common stock in that
A) preferred stock usually has a maturity date.
B) preferred stock investors have a higher required return than common stock investors.
C) preferred stock dividends are fixed.
D) common stock investors have a required return and preferred stock investors do not.
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Chapter 9: The Cost of Capital
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Q1) Johnson Production Company paid a dividend yesterday of $3.50 per share.The dividend is expected to grow at a constant rate of 10% per year.The price of KayCee's common stock today is $40 per share.If KayCee decides to issue new common stock,flotation costs will equal $4.00 per share.KayCee's marginal tax rate is 35%.Based on the above information,the cost of retained earnings is A) 26.41%.
B) 20.09%.
C) 19.63%.
D) 17.55%.
Q2) The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments may be in a higher risk class. A)True
B)False
Q3) The capital asset pricing model uses three variables to evaluate required returns on common equity: the risk-free rate,the beta coefficient,and the market risk premium.
A)True B)False
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Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) Arguments against using the net present value and internal rate of return methods include that
A) they fail to use accounting profits.
B) they require detailed long-term forecasts of the incremental benefits and costs.
C) they fail to consider how the investment project is to be financed.
D) they fail to use the cash flow of the project.
Q2) When reviewing the net present profile for a project,
A) the higher the discount rate, the higher the NPV.
B) the higher the discount rate, the higher the IRR.
C) the IRR will always be a point on the horizontal axis line where NPV = 0.
D) the IRR will always be a point on the horizontal axis equal to the required return.
Q3) For the net present value (NPV)criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.
A) greater than zero; greater than the required return
B) greater than or equal to zero; greater than zero
C) greater than one; greater than or equal to one
D) greater than or equal to zero; greater than or equal to one
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Q1) The initial outlay of a project may be reduced by the after-tax salvage value of replaced equipment.
A)True
B)False
Q2) Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?
A) increase in accounts receivable
B) cost of issuing new bonds if the project is financed by a new bond issue
C) installation costs
D) None of the above-all are considered.
Q3) If depreciation expense in year one of a project increases for a highly profitable company,
A) net income decreases and incremental free cash flow decreases.
B) net income increases and incremental free cash flow increases.
C) the book value of the depreciating asset increases at the end of year one.
D) net income decreases and incremental free cash flow increases.
Q4) Reducing the probability of bankruptcy is a benefit of diversification.
A)True
B)False
Q5) Give an example of an option to delay a project.Why might this be of value?
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Chapter 12: Determining the Financing Mix
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Q1) An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.
A)True
B)False
Q2) A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.
A)True
B)False
Q3) If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.
A)True
B)False
Q4) Financial structure is another term for capital structure.
A)True
B)False
Q5) Identify several factors that influence the decision to issue debt.
Q6) Describe the sources of business risk.
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Chapter 13: Dividend Policy and Internal Financing
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Q1) AFB,Inc.'s dividend policy is to maintain a constant payout ratio.This year AFB,Inc.paid out a total of $2 million in dividends.Next year,AFB,Inc.'s sales and earnings per share are expected to increase.Dividend payments are expected to
A) remain at $2 million.
B) increase above $2 million.
C) decrease below $2 million.
D) increase above $2 million only if the company issues additional shares of common stock.
Q2) A firm's dividend policy includes two basic components: the dividend payout ratio and dividend stability.
A)True
B)False
Q3) An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values.
A)True
B)False
Q4) What managerial logic might lie behind a stock split or a stock dividend?
Q5) What is the information effect associated with dividends? Why does it occur?
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Chapter 14: Short-Term Financial Planning
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Q1) Discretionary financing needed can be positive or zero,but not negative.
A)True
B)False
Q2) Discretionary financing needed will be zero when the company's sales growth rate is zero.
A)True
B)False
Q3) Fixed assets are often estimated incorrectly by the percent of sales method because A) fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
B) fixed asset are very expensive.
C) fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
D) fixed assets are part of the capital budgeting process.
Q4) The accuracy of the percent of sales forecast method is impaired if A) scale economies are present for assets.
B) assets must be purchased in discrete quantities.
C) asset needs are independent of sales level.
D) All of the above impair the accuracy of the percent of sales forecast method.
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Chapter 15: Working-Capital Management
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Q1) The effective annual cost of not taking advantage of the 1/10,net 60 terms offered by a supplier is
A) 1.50%.
B) 5.37%.
C) 6.69%.
D) 7.27%.
Q2) A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.
A)True
B)False
Q3) If a company's inventory turnover increases from 8 to 10,then its cash conversion cycle will also increase,i.e.,get longer.
A)True
B)False
Q4) Both compensating balances and discounting interest increase the effective interest rate on a loan.
A)True
B)False
Q5) What are some examples of unsecured and secured sources of short-term credit?
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Chapter 16: International Business Finance
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Q1) Investments in capital markets in foreign countries are motivated by the desire to earn higher returns and reduce risk through international diversification.
A)True
B)False
Q2) Suppose a U.S.importer purchases an Italian product today but will not pay for it for 90 days.The cost of the product today is 30,000 euros.The spot exchange rate today is .6233 euros per dollar.If the U.S.importer does not hedge the position,which of the following spot exchange rates in 90 days will yield the highest returns?
A) 0.6833 euros per dollar
B) 0.6499 euros per dollar
C) $1.4844 per euro
D) $1.5387 per euro
Q3) The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.
A)True
B)False
Q4) Who is an arbitrageur? How does an arbitrageur make money?
Q5) What is a forward exchange rate?
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) If a firm extends 4/10,net 60-day terms of sale,what is the cost in terms of nominal APR? Assume a 360-day year.
A) 29.40%
B) 30.0%
C) 23.99%
D) 27.86%
Q2) A local lamp store expects to sell 2000 lamps in the coming year.It costs the store $1.00 in carrying costs for each lamp and $10.00 for each order placed.
a.What is the economic order quantity for the lamps?
b.How many orders will be placed each year?
c.If the store wants a one-week safety stock and it takes one week to receive an order after it has been placed,what should the inventory level be when a new order is placed? Assume a 50-week year.
Q3) Accounts receivable is an asset representing sales made on credit.
A)True B)False
Q4) The selection of a proper marketable-securities mix involves evaluation of certain criteria.What are these criteria and why are they important?
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