Financial Decision Making
Chapter Exam Questions
Course Introduction
Financial Decision Making explores the principles and techniques used to make effective financial choices in both personal and organizational contexts. The course covers core topics such as financial analysis, budgeting, capital investment decisions, risk assessment, and the valuation of financial assets. Students will also examine how managers use financial information to plan, evaluate, and control business operations, with an emphasis on practical tools and real-world case studies. By the end of the course, students will be equipped to analyze financial statements, assess investment opportunities, and apply decision-making frameworks that support sound financial strategies.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which of the following are disadvantages of a general partnership?
I.Limited life of the firm
II.Personal liability for firm debt
III.Greater ability to raise capital than a sole proprietorship
IV.Lack of ability to transfer partnership interest
A)I and II only
B)III and IV only
C)II and III only
D)I,II,and IV only
E)I,III,and IV only
Answer: D
Q2) Which type of business is the easiest to form?
A)Limited partnership
B)Limited liability company
C)General partnership
D)Corporation
E)Sole proprietorship
Answer: E
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Chapter 2: Financial Statements and Cash Flow
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Q1) _____ refers to a firm's interest payments minus any net new borrowing.
A)Operating cash flow
B)Distributable cash flow
C)Net working capital
D)Cash flow to equity investors
E)Cash flow to creditors
Answer: E
Q2) Which one of the following accounts is generally the most liquid?
A)Patent
B)Building
C)Accounts receivable
D)Equipment
E)Inventory
Answer: C
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) Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?
A)Inventory
B)Cash
C)Long-term debt
D)Accounts payable
E)Fixed assets
Answer: C
Q2) Which ratio computes the amount of net income generated per each $1 of sales?
A)EV multiple
B)Gross margin
C)Return on equity
D)Profit margin
E)PE ratio
Answer: D
Q3) Identify the three parts of the DuPont identity and specify what each part measures. Answer: ROE = Profit margin (Operating efficiency)× Total asset turnover (Asset use efficiency)× Equity multiplier (Financial leverage).
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Chapter 4: Discounted Cash Flow Valuation
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Q1) Which one of these statements related to the time value of money is correct? Assume a positive rate of interest.
A)A dollar increases in value the further into the future it is received.
B)The future value of an invested dollar is inversely related to the rate of interest.
C)The present value of a dollar to be received in one year is directly related to the interest rate.
D)A dollar received today is more valuable than a dollar received next month.
E)A dollar invested today will increase in value in a linear manner if interest earned is reinvested.
Q2) The interest rate charged per period multiplied by the number of periods per year is called the:
A)effective annual rate.
B)compound interest rate.
C)periodic interest rate.
D)annual percentage rate.
E)daily interest rate.
Q3) Identify a type of loan that is a pure discount loan and explain which features of the loan qualify it to be classified as a pure discount loan.
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Chapter 5: Interest Rates and Bond Valuation
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Q1) The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:
A)liquidity effect.
B)Fisher effect.
C)term structure of interest rates.
D)inflation premium.
E)interest rate risk premium.
Q2) Identify at least five factors that affect the yield on a corporate bond.For each factor identified,explain how the factor affects the prices of bonds with varying maturities.
Q3) A corporate bond yields 7.3 percent.What municipal bond rate is equivalent to the corporate rate for an investor with a 25 percent marginal tax rate?
A)5.84%
B)9.13%
C)5.48%
D)6.08%
E)9.73%
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Chapter 6: Stock Valuation
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Q1) Corporate dividends:
A)are a source of tax-free income for individual investors.
B)reduce the taxable income of the payer.
C)are only 70 percent taxable to corporate shareholders.
D)are paid out of pre-tax income and thus are taxed at the personal level.
E)are taxed at the personal level even though they are paid from aftertax income.
Q2) Multiple classes of stock are primarily created to:
A)allow certain shareholders to retain control of a firm.
B)replace cash dividends with share repurchases.
C)allow common stock to have cumulative privileges.
D)eliminate preemptive rights.
E)ensure all shareholders have equal rights.
Q3) A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n)______ market.
A)over-the-counter
B)auction
C)broker
D)regional
E)trading floor
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) Which one of the following is the best example of two mutually exclusive projects?
A)Building a warehouse and a retail outlet side by side on company property
B)Buying sufficient inventory to stock both the warehouse and the retail outlet
C)Using the company's sales force to sell items to both individuals and other retailers
D)Assigning an employee to work in the retail outlet rather than in the warehouse
E)Acquiring a computer program to track inventory throughout the warehouse and retail store
Q2) Rodriquez's Hot Rods is considering a new project with an initial cost of $26,410 and a discount rate of 8 percent.The project is expected to have one cash inflow of $42,500 in
Year 2.What is the discounted payback period?
A).72 years
B)1.39 years
C).62 years
D)1.72 years
E)1.62 years
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Chapter 8: Making Capital Investment Decisions
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Q1) A pro forma income statement for a cost reduction project:
A)will generally reflect no incremental sales.
B)will reflect a reduction in the sales revenue.
C)will exclude any effects of depreciation.
D)cannot be prepared due to the lack of any project related sales.
E)will always reflect a negative project operating cash flow.
Q2) A project will produce operating cash flows of $42,000 a year for four years.During the life of the project,inventory will be lowered by $12,000,accounts receivable will increase by $15,000,and accounts payable will increase by $10,000.The project requires $120,000 of new equipment that will be depreciated straight-line to a zero book value over four years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $25,000,after taxes.What is the net present value given a required return of 14 percent?
A)$13,483.48
B)$18,117.05
C)$20,033.36
D)$12,037.86
E)$14,322.49
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) You are considering a project that has been assigned a discount rate of 8 percent.If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years.If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.What is the value of the option to wait?
A)$15.23
B)$17.08
C)$18.67
D)$20.20
E)$50.20
Q2) Which term is used to represent the sales level that results in a project's net income exactly equaling zero?
A)Operational break-even
B)Financial break-even
C)Accounting profit break-even
D)Cash break-even
E)Present value break-even
Q3) 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) Assume a $1 investment in a stock 65 years ago is now worth $211.46.What is the geometric average return for the period?
A)8.59%
B)9.16%
C)9.58%
D)10.24%
E)11.06%
Q2) For our historical comparison purposes,how are large-company stocks defined?
A)Stocks of the lowest 20 percent of the firms listed on the NYSE based on market capitalization
B)Stocks with average annual returns that exceed the average annual return of the U.S.Treasury bill
C)Any firm that has been listed on the NYSE for 40 years or more
D)Stocks of firms included in the S&P 500 composite index
E)Stocks of firms that employ over 5,000 employees
Q3) What does market history tell us about the future performance of various securities?
Q4) How does the payment of a dividend affect the total return on a stock?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Q1) The primary purpose of portfolio diversification is to:
A)increase returns and risks.
B)eliminate all risks.
C)eliminate asset-specific risk.
D)lower both returns and risks.
E)eliminate systematic risk.
Q2) The portfolio expected return considers which of the following factors?
I.The amount of money currently invested in each individual security
II.Various levels of economic activity
III.The performance of each stock given various economic scenarios
IV.The probability of various states of the economy occurring
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV only
Q3) If an optimal portfolio of risky assets can be identified,why should investors mix that portfolio with risk-free securities?
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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Chapter 12: Risk, Cost of Capital, and Valuation
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Q1) A levered firm has a debt-to-equity ratio of .6 and an equity beta of 1.42.What would be the beta of the firm if it switched to an all-equity financial structure?
A).8520
B)2.3700
C)2.2720
D).5325
E).8875
Q2) The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?
A)7.24%
B)7.09%
C)7.18%
D)7.37%
E)7.32%
Q3) Identify the three key determinants of beta and identify a situation for each of those determinants that will tend to produce a high beta value.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) Based on the efficient market hypothesis,a stock's abnormal return at Time t is an indicator of:
A)semistrong form inefficiency.
B)cumulative market expectations.
C)a release of information at Time t.
D)conservatism.
E)weak form inefficiency.
Q2) In an efficient market,the price of a security will:
A)react immediately to new information with no further price adjustments related to that information.
B)react to new information over a two-day period after which time no further price adjustments related to that information will occur.
C)rise sharply when new information is first released and then decline to a new stable level by the following day.
D)always rise immediately upon the release of new information with no further price adjustments related to that information.
E)be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) MM Proposition II without taxes implies that the required return on equity is:
A)a result of homemade leverage.
B)inversely related to the firm's debt-to-equity ratio.
C)a linear function of the firm's debt-to-equity ratio.
D)independent of the firm's capital structure.
E)a linear function of the market's rate of interest.
Q2) MM Proposition I with tax is based on the concept that the:
A)optimal capital structure is the one that is totally financed with equity.
B)capital structure of the firm does not matter because investors can use homemade leverage.
C)firm is worse off levered than unlevered.
D)value of the firm increases as total debt increases because of the interest tax shield.
E)cost of equity increases as the debt-equity ratio of a firm increases.
Q3) Draw a graph with EPS on the vertical axis and earnings before interest on the horizontal axis.Assume there are no taxes.Draw lines depicting a levered and an unlevered firm.Identify the point where the firm is indifferent to its capital structure and also the area that represents the advantage of debt.
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 is correct?
A)Only the nonmarketed claims of a firm can be bought and sold.
B)An increase in a firm's marketed claims will increase the total value of a firm.
C)The total value of a firm is independent of the firm's cash flows.
D)Managers try to maximize both marketed and nonmarketed claims in order to maximize total firm value.
E)The value of a firm's marketed claims can change with changes in the firm's capital structure.
Q2) The free cash flow hypothesis supports:
A)decreasing stockholder dividends to retain more cash within the firm.
B)reducing a firm's level of debt to save the cash currently being spent on interest payments.
C)increasing the debt portion of a firm's capital structure.
D)hiring managers with little or no stock ownership in the firm.
E)the idea that firms with high levels of free cash flow are more apt to make good acquisitions than firms with low levels.
Q3) Explain a Section 363 bankruptcy and identify its primary benefit over a traditional bankruptcy.
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Chapter 16: Dividends and Other Payouts
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Q1) End Zone just paid an annual dividend of $.68 a share.The firm has a target payout ratio of .6 and a speed of adjustment value of .4.What is the expected value of next year's annual dividend if the firm expects its earnings per share to be $2.20?
A)$.94
B)$.90
C)$1.09
D)$1.32
E)$.53
Q2) Bruno's has 17,000 shares of stock outstanding with a par value of $1 per share and a market value of $38.29 per share.The balance sheet shows $17,000 in the common stock account,$528,360 in the capital in excess of par value account,and $432,500 in the retained earnings account.The firm just announced a 50 percent (large)stock dividend.What will be the balance in the capital in excess of par value after the dividend?
A)$211,395
B)$792,540
C)$845,325
D)$528,360
E)$202,895
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Chapter 17: Options and Corporate Finance
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Q1) Which variable within the Black-Scholes option pricing formula is the delta?
A)S
B)e<sup>-Rt</sup>
C)N(d<sub>2</sub>)
D)N(d<sub>1</sub>)
E)E
Q2) Atlas stock is selling for $54.38 a share.A $52.50 call is valued at $2.50.What is the time value of ten call option contracts?
A)$18.80
B)$620.00
C)$188.00
D)$6.20
E)$62.00
Q3) Which one of these combinations is a protection put?
A)Writing identical puts and calls on the same asset
B)Buying a put and buying the underlying asset
C)Selling a call and buying the underlying asset
D)Buying a call and selling the underlying asset
E)Selling a put and buying the underlying asset
Q4) What is a protective put and what does it protect?
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Chapter 18: Short-Term Finance and Planning
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Q1) The Babco Co.has a $250,000 line of credit with a 9 percent interest rate and a 10 percent compensating balance requirement that is based on the total amount borrowed.What is the effective interest rate if the firm needs $117,000 to finance some expenses? The company plans on repaying the loan in a lump sum at the end of one year.
A)7.20%
B)7.27%
C)8.08%
D)9.80%
E)10.00%
Q2) First Bank offers KNJ Co.a $100,000 line of credit at an annual rate of interest of 9.5 percent.The loan agreement also requires a 4 percent compensating balance on any funds used.What is the effective annual interest rate if the firm needs $60,000 for the entire year to fund its operations?
A)9.50%
B)9.62%
C)9.90%
D)9.81%
E)9.74%
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Chapter 19: Raising Capital
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Q1) Which one of the following best fits the description of a private placement?
A)5-year commercial bank loan
B)10-year loan from an insurance company
C)2-year direct business loan
D)3-year loan to a firm by its original founder
E)20-year bonds sold in the public markets
Q2) Mountain View is an all-equity firm with 125,000 shares of stock outstanding.The book value per share is $9 and the market value per share is $27.The current net income is $148,750.An expansion project will cost $780,000.Assume the price-earnings ratio remains constant.What must the new net income be for the market price to remain at $27?
A)$153,889
B)$183,128
C)$166,667
D)$157,415
E)$182,997
Q3) Explain how a Dutch auction operates and why a firm might choose to sell its securities in this manner.
Q4) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
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Chapter 20: International Corporate Finance
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Q1) Assume the spot exchange rate is 6.22 Chinese yuan per U.S.dollar.If the inflation rate in China is expected to be double that in the U.S.for the next two years,then the:
A)exchange rate will decrease.
B)exchange rate will double.
C)yuan will appreciate relative to the dollar.
D)yuan will become more valuable.
E)dollar will strengthen against the yuan.
Q2) Which one of these presents the idea that forward rates are equal to expected future spot rates?
A)International Fisher effect
B)Interest rate parity
C)Uncovered interest rate parity
D)Triangle arbitrage
E)Unbiased forward rate condition
Q3) How well do you think relative purchasing power parity and uncovered interest parity behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q2) Global Network has a market value of $898,000.AG Communications has 50,000 shares of stock outstanding at a price per share of $60.AG is acquiring Global in an exchange for 15,000 shares of AG stock.The merger is expected to create $220,000 of synergy.What will be the post-merger value of the firm?
A)$3,218,000
B)$3,782,000
C)$4,118,000
D)$3,220,000
E)$3,898,000
Q3) Which of these may be a source of synergy?
I.Unused debt capacity
II.Economies of scale
III.Increase in overall revenue
IV.Unused net operating losses
A)I and IV only
B)II and III only
C)II,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
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