Financial Decision Making
Question Bank
Course Introduction
Financial Decision Making explores the principles and analytical tools essential for making sound financial choices in both personal and organizational contexts. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, and strategies for financing and investment. Students will learn how to evaluate financial alternatives, interpret quantitative data, and use decision-making frameworks to solve real-world financial problems, enhancing their ability to make informed fiscal decisions in a dynamic economic environment.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) General partners have unrestricted transferability of ownership,while limited partners must have the consent of all partners to transfer their ownership.
A)True
B)False
Answer: False
Q2) In regard to the agency problem,________ are the principal owners of a corporation.
A)shareholders
B)managers
C)employees
D)suppliers
Answer: A
Q3) Which of the following is NOT true for limited partnerships?
A)Limited partners can only manage the business.
B)One general partner must exist who has unlimited liability.
C)Only the name of general partners can appear in the name of the firm.
D)Limited partners may sell their interest in the company.
Answer: A
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) The principal participants in the financial markets are
A)businesses,banks,government.
B)borrowers,savers,financial institutions.
C)mutual funds,hedge funds,investment bankers.
D)dealers,brokers,regulators.
Answer: B
Q2) Which of the following financial instruments is not traded in the capital markets?
A)Debt with a maturity of less than one year
B)Bonds
C)Common stock
D)Preferred stock
Answer: A
Q3) Each year,shareholders receive a dividend equal to the firm's net earnings divided by the number of shares of common stock.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) The income statement shows a company's earnings since it has been in business.
A)True
B)False
Answer: False
Q2) Net plant and equipment is
A)plant and equipment purchases less amount borrowed to finance purchases.
B)current year plant and equipment purchases less current year's depreciation expense.
C)gross plant and equipment less accumulated depreciation.
D)plant and equipment at current market valuations.
Answer: C
Q3) Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?
A)Balance sheet
B)Cash flow statement
C)Income statement
D)None of the above
Answer: C
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Page 5
Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) A firm has a return on equity of 20% and a total asset turnover of 4.Assuming a debt ratio of 50% and sales of $1,000,000,calculate net income.
A)$25,000
B)$50,000
C)$75,000
D)$100,000
Q2) Ortny Industries has an accounts receivable turnover ratio of 4.3.If Ortny has an accounts receivable balance of $90,000,what is Ortny's average daily credit sales?
A)$387,000
B)$1,548
C)$1,060
D)$3,521
Q3) Since 2013,ABC's inventory management has A)improved.
B)deteriorated.
C)remained the same.
D)changed but in an indeterminate manner.
Q4) Discuss the limitations of ratio analysis.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.Her cash flow at time period 0 is
A)$1,000
B)-$1,000
C)$-990
D)$1,010
Q2) If we invest money for 10 years at 8% interest,compounded semi-annually,we are really investing money for 20 six-month periods,during which we receive 4% interest each period.
A)True
B)False
Q3) Financial managers use the time value of money to A)make business decisions.
B)compare cash flows of different projects.
C)determine the price of common stock.
D)both A and B.
E)all of the above.
Q4) If you deposit $1,000 each year in a savings account earning 4%,compounded annually,how much will you have in 10 years?
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) George and Laura will be retiring in four years and would like to buy a lake house.They estimate that they will need $550,000 at the end of four years to buy this house.They want to make four equal annual payments into an account at the end of each year.If they can earn 8% on their money,compounded annually,over the next four years,how much must they invest at the end of each year for the next four years to have accumulated $550,000 by retirement?
A)$137,500
B)$122,056
C)$113,015
D)$131,821
Q2) If a loan of $10,000 is paid back in equal annual end-of-year payments of $2,570.69 during the next five years,what is the annual interest rate on the loan?
A)2%
B)5%
C)9%
D)12%
Q3) If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Which of the following best measures an asset's risk?
A)Expected return
B)The standard deviation
C)The probability distribution
D)The cash return
Q2) Are markets moving toward being more efficient or toward being less efficient?
Q3) The expected rate of return is the weighted average of the possible returns for an investment.
A)True
B)False
Q4) If a market is weak form efficient,an investor can make higher than expected profits by studying the past price patterns of a stock.
A)True
B)False
Q5) Arithmetic average rate of return takes compounding into effect.
A)True
B)False
Q6) Under the efficient market hypothesis,would securities be properly priced.
Q7) Why do the arithmetic average return and the geometric return differ?
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The expected return on the market portfolio is currently 11%.Battmobile Corporation stockholders require a rate of return of 23.0%,and the stock has a beta of 2.5.According to CAPM,determine the risk-free rate.
A)17.5%
B)2.75%
C)3.0%
D)9.2%
Q2) The security market line (SML)relates risk to return,for a given set of market conditions.If risk aversion increases,which of the following would most likely occur?
A)The market risk premium would increase.
B)Beta would increase.
C)The slope of the SML would increase.
D)The SML line would shift up.
Q3) The security market line (SML)intercepts the Y axis at the risk-free rate.
A)True
B)False
Q4) Unsystematic risk can be eliminated through diversification.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) The better the bond rating,the lower the rate of return demanded in the capital markets.
A)True
B)False
Q2) If the issuing company becomes insolvent,the claims of the bondholders are honored before those of preferred stockholders.
A)True
B)False
Q3) The detailed legal agreement between a bond's issuer and its trustees is known as the
A)collateral agreement.
B)call provision.
C)indenture.
D)covenant.
Q4) When inflation rates go up,bond prices go up as well.
A)True
B)False
Q5) The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) The P/E ratio is calculated by dividing
A)the current stock price by stockholders' equity.
B)total assets by net income.
C)the current stock price by earnings per share.
D)the current stock price by operating cash flow per share.
Q2) You are considering the purchase of common stock that just paid a dividend of $6.50 per share.Security analysts agree with top management in projecting steady growth of 12% in dividends and earnings over the foreseeable future.Your required rate of return for stocks of this type is 18%.How much should you expect to pay for this stock?
A)$86
B)$94
C)$108
D)$121
E)$242
Q3) Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the required rate of return?
Q4) Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Which of the following best explains the continuing popularity of the payback method?
A)Mathematical simplicity and some insight into the riskiness of cash flows.
B)Uses all cash flows and takes into account the time value of money.
C)Reliably selects the projects that add most value to the firm.
D)It provides objective selection criteria and is taught as the primary method in most business schools.
Q2) Currently,most firms use NPV and IRR as their primary capital-budgeting technique.
A)True
B)False
Q3) The payback method focuses primarily on the length of time required to recover the cost of the investment rather than estimating the total value the project will add to the firm.
A)True
B)False
Q4) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) The introduction of a new product at Elia Pharmaceuticals will require a $450,000 increase in inventory,a $730,000 increase in Accounts Receivable,and a $180,000 increase in Accounts Payable.Introduction of the product will also require a $700,000 expenditure for advertising.The increase in net working capital required for the introduction of this product is
A)$1,180,000.
B)$1,000,000.
C)$1,360,000.
D)$1,700,000.
Q2) When computing project cash flows,it is necessary to apply the same rate of inflation to all costs and revenues.
A)True
B)False
Q3) If depreciation expense is taken over 5 years rather than 3 years,all things equal, A)net present value will go down.
B)depreciation has no effect on net present value.
C)net present value will go up.
D)the answer depends on the company's marginal tax rate.
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) For a line of snowblowers sold by Arctic Equipment,fixed costs,including depreciation of $1,000,000,total $2,400,000.The snowblowers sell for $800 each.Variable costs of a snowblower are $500.Compute a.accounting break-even.
b.cash break-even
Q2) One type of real option is to delay the beginning of a project until conditions are more favorable.
A)True
B)False
Q3) The form of risk analysis intended to identify the most important forces for the success or failure of a project is known as
A)scenario analysis.
B)sensitivity analysis.
C)value driver analysis.
D)expected value analysis.
Q4) Most of the variables used in forecasting cash flows are known with certainty.
A)True
B)False
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Caribe's common stock sells for $41,and dividends paid last year were $1.18.The dividends and earnings per share are predicted to have a 5% growth rate.What is the cost of common equity for Caribe?
Q2) An increase in ________ will increase the cost of common equity.
A)the expected growth rate of dividends
B)the risk-free rate
C)the dividend
D)both A and B
Q3) Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of common equity using the CAPM approach?
A)21.25%
B)15.81%
C)9.25%
D)6.32%
Q4) Survey literature indicates that separate project costs of capital
A)are used by less than half of major companies.
B)are used by more than 75% of major companies.
C)are used by nearly all major companies.
D)are almost never used by major companies.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The level of EBIT that will equate EPS between two different financing plans is called the
A)indifference point.
B)optimal capital plan.
C)pivot point.
D)tradeoff point
Q2) The original form of the Modigliani and Miller Capital Structure Theorem
A)ignores the effect of taxes.
B)ignores the relationship between firm value and cost of capital.
C)ignores transaction costs.
D)both A and C are true.
Q3) The pecking order theory of capital structure is derived from A)expectations theory.
B)the Modigliani-Miller theory.
C)liquidity preference theory.
D)agency theory.
Q4) Investors require a higher return on common stock investments if a firm uses less leverage.
A)True
B)False
Page 17
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Chapter 16: Dividend Policy
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Sample Questions
Q1) The final approval of a dividend payment comes from the A)controller.
B)president of the company.
C)board of directors.
D)Chief Financial Officer.
Q2) Which of the following motivates corporations to split their common stock?
A)To keep the price of the firm's common stock within an optimum price range
B)To increase retained earnings
C)To reallocate capital to shareholders
D)To narrow ownership of the firm
Q3) Reducing dividends will usually have a negative impact on the stock price.
A)True
B)False
Q4) Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to pay a $2 million dollar dividend,the company will have ________ shares outstanding worth approximately ________.
A)900,000,$20 per share
B)1,000,000,$20 per share
C)900,000,$22.22 per share
D)1,000,000,$18 per share
Page 18
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) The percent-of-sales method is more detailed than the cash budget method.
A)True
B)False
Q2) Discretionary financing needs implies
A)that management may choose between various forms of debt and equity.
B)that the purchases being financed are optional rather than necessary.
C)that management has considerable discretion in how to dispose of retained earnings.
D)that management may choose between debt,new equity or retained earnings.
Q3) Which of the following is a source of external capital?
A)Retained earnings
B)Inventory
C)Long-term debt
D)Operating income (earnings before interest and taxes)
Q4) Pro forma statements are important since they formally report the performance of the firm during a previous reporting period.
A)True
B)False
Q5) What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Increasing the accounts payable deferral period also increases the cash conversion cycle.
A)True
B)False
Q2) Once a cash discount period has passed
A)one should pay immediately.
B)there is no financial incentive to pay before the final due date.
C)one should pay after the final due date.
D)cannot be determined from the information.
Q3) The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit.If the borrower would not normally have deposits in such an account
A)the amount borrowed will be higher than the amount needed.
B)the APR will be less than the stated rate.
C)the amount borrowed will be lower than the amount needed.
D)neither the amount borrowed nor the APR will be affected by the required balance.
Q4) The current ratio and net working capital are good predictors of a firm's ability to meet its short term obligations.Agree or disagree.
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Chapter 19: International Business Finance
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Sample Questions
Q1) The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the
A)purchasing power parity theory.
B)balance of payments quantum theory.
C)interest rate parity theory.
D)arbitrage markets theory.
Q2) Some complexities of conducting international business include A)multiple currencies.
B)differing legal requirements.
C)restrictions on repatriating earnings.
D)all of the above.
Q3) A narrow spread indicates efficiency in the spot exchange market.
A)True
B)False
Q4) Forward rates,like spot rates,are quoted in both direct and indirect form.
A)True
B)False
Q5) One U.S.dollar buys 12.9923 Mexican pesos and .7585 euros.What is the peso/euro exchange rate.
21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Assume that government and insurance providers pressure physicians to prescribe generic drugs whenever possible.For the producers of branded drugs,this change represents
A)insurable risk.
B)operational risk.
C)demand risk.
D)hedgeable risk.
Q2) Which of the following is NOT an advantage of futures contracts?
A)They are inexpensive compared to customized forward contracts.
B)They trade on exchanges rather than over the counter.
C)Features such as contract size and expiration date are standardized.
D)The size and commodity can always be perfectly tailored to form a perfect hedge.
Q3) A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.
A)True
B)False
Q4) Some risks cannot be transferred to other parties.
A)True
B)False
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