Financial Decision Making Review
Questions
Course Introduction
Financial Decision Making explores the principles and methodologies used to make sound financial choices in both personal and organizational contexts. The course covers topics such as budgeting, financial analysis, risk assessment, capital budgeting, and resource allocation. Students will learn to interpret financial statements, evaluate investment opportunities, and utilize quantitative tools to facilitate informed decisions. Through case studies and real-world examples, the course aims to develop analytical skills and strategic thinking necessary for effective financial planning and management.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) The two most important disciplines on which financial management relies are
A) accounting and production
B) accounting and marketing
C) economics and marketing
D) accounting and economics
Answer: D
Q2) When KKR acquired RJR Nabisco, the ____ in the debt ratio, resulted in a(n) ____ in the value of the firm's outstanding bonds.
A) decrease, increase
B) increase, increase
C) decrease, decline
D) increase, decline
Answer: D
Q3) An economic principle used in finance is:
A) Full utilization of data processing
B) Marginal analysis where marginal costs are set equal to marginal revenues.
C) Accrual basis of recognizing revenues and expenses
D) Target capital structure
Answer: B
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) An exchange rate quoted as $1.47 per British pound is known as a ____ quote.
A) hedge
B) direct
C) futures
D) indirect
Answer: B
Q2) The interest rate at which banks in the Eurocurrency market lend to each other is known as the ____.
A) Eurocurrency currency rate (ECR)
B) London interbank offer rate
C) exchange rate
D) interest rate parity
Answer: B
Q3) The difference between merchandise exports and imports is known as the ____.
A) transaction exposure
B) difference in purchasing power
C) merchandise trade balance
D) import/export reserve
Answer: C
Page 4
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) The sales-to-inventory ratio:
A) is superior to the inventory turnover ratio.
B) as a determination of financial performance, is good comparison tool.
C) is technically inferior to other commonly used ratios.
D) was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole.
Answer: C
Q2) What information can Asset Management Ratios provide?
Answer: Asset Management Ratios indicate:
1. how much a firm has invested in a particular type of asset relative to the revenue being produced by the asset.
2. how efficiently the firm is allocating its resources.
3. whether or not the firm has achieved an effective asset structure in generating sales revenue.
4. whether or not the firm has achieved the best mix of cash, receivables, inventories, plant, property and equipment (total assets).
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5
Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
A) $339,600
B) $283,200
C) No financing needed, surplus of $224,400
D) No financing needed, surplus of $524,400
Q2) Cash budgeting can be employed effectively by management to
A) identify potential cash flow problems in advance
B) aid them in capital budgeting
C) control retained earnings
D) coordinate cash and deferred expenses
Q3) Explain the cash flow generation process:
Q4) An operational plan is necessary to determine what the firm wants to be at some future point in time. What does an operational plan consist of?
Q5) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) If a 16 year old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20 - 65) at 9%.
A) $442,014
B) $386,616
C) $1,767,995
D) $9,146
Q2) John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he pay?
A) $7,173.90
B) $2,717.39
C) $12,000.00
D) $25,924.23
Q3) Annuity due calculations are especially important when dealing with
A) term loans
B) lease contracts
C) capital investments
D) capital recovery problems
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Page 7
Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Sample Questions
Q1) Marko needs to raise capital through a zero-coupon bond debt offering. If the bonds will have 12 years to maturity and the rate of return on a bond in Marko's risk class is 11 percent, what will be the selling price of the bond?
A) $302.50
B) $335.50
C) $269.50
D) $286.00
Q2) A zero coupon bond is a bond that
A) originally sold at a discount
B) will sell for a premium
C) is a premium value bond
D) has a high current yield
Q3) The ____ represents the debtholders in dealings with the issuing company.
A) trustee
B) stakeholders
C) broker
D) investment banker
Q4) What is a "payment-in-kind" bond and why is it considered a "weak security"?
Q5) How does a firm value an asset?
Q6) List the advantages and disadvantages of long-term debt financing: Page 8
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Page 9
Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) What are some of the costs associated with new security offerings?
Q2) If Crafty Creatures Cage Maker stock sells for $18 per share and the firm nets $12 per share, the difference is called the:
A) Underwriting Spread
B) Profit
C) SEC charge
D) Refund
Q3) A change in the market price of an asset will occur as a result of changes in:
A) investors' required rates of return
B) investors' expected returns from the asset
C) book value of the asset
D) investors' required rates of return and their expected returns from the asset
Q4) The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant,
A) so the value of the firm should also remain constant
B) so the required rate of return should also remain constant
C) and the firm can not be valued
D) forever
Q6) List the various rights of common stockholders. Page 10
Q5) What are the advantages and disadvantages of common stock financing?
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) ____ refers to the ability of an investor to buy and sell a company's securities quickly and without a significant loss of value.
A) Default risk
B) Business and financial risk
C) Maturity risk
D) Marketability risk
Q2) The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta?
A) 1.00
B) 1.14
C) 1.05
D) 1.16
MVS = $40(10,000,000) = $400,000,000
MVM = $60(2,000,000) = $120,000,000
Q3) List types of events that influence systematic (non-diversifiable) risk.
Q4) What is an efficient portfolio?
Q5) Explain marketability risk and marketability premium.
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.
A) $296,800
B) $136,200
C) $192,200
D) $209,200
Q2) Projects are often classified based on the type of capital expenditure. All of the following are project classifications EXCEPT:
A) projects generated by growth opportunities
B) projects generated by cost reduction opportunities
C) projects generated to meet legal requirements and health and safety standards
D) projects generated to meet the needs of customers
Q3) In classifying investment projects, there are several types of capital expenditures. List them.
Q4) Why should sunk costs not be considered when evaluating a project?
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.
A) $211,080
B) $392,580
C) $588,710
D) $160,920
Q2) Generally, the ____ is considered to be a more realistic reinvestment rate than the ____.
A) risk-free rate, internal rate of return
B) internal rate of return, cost of capital
C) cost of capital, internal rate of return
D) risk-free rate, cost of capital
Q3) The disadvantages of the payback approach include:
A) cash flows after the payback period are ignored in the calculation
B) payback ignores the time value of money
C) payback fails to provide an objective decision-making criterion
D) all of the above
Q4) How does the profitability index differ from the net present value and when would each method be preferred?
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) Many firms combine net present value and payback when analyzing project risk. Which of the following statements is/are correct?
I. Both payback and net present value consider the frequency of cash flows.
II. Both payback and net present can be adjusted for risk.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q2) The basic capital budgeting decision models, that is, NPV and IRR, handle risk by
A) ignoring it
B) assuming all cash flows are known with certainty
C) assuming all projects are of average risk and evaluating them based on expected values
D) using risk-adjusted discount rates to evaluate projects
Q3) How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm?
Q4) What are the weaknesses of the net present value/payback approach?
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) The cost of equity capital for non-dividend paying stocks can be determined by
A) using the Capital Asset Pricing Model
B) estimating ke for comparable dividend-paying stocks in their industry
C) forecasting the liquidation proceeds from the sale of the company's assets.
D) using the CAPM and by estimating ke for comparable dividend-paying stocks in their industry
Q2) Firms can raise capital in two ways. Why is it that internal funding does not have a zero cost?
Q3) The most appropriate weights to use in calculating a firm's cost of capital are the proportions of the components in the firm's ____ capital structure.
A) historical average
B) long-range target
C) current
D) industry average
Q4) If a firm is losing money then the after-tax cost of debt is
A) equal to kd (1 - T)
B) found by trial and error
C) equal to the pretax cost of debt
D) equal to the yield to first call date
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Chapter 13: Capital Structure Concepts
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Q1) What is the market value of Barings, a firm with total assets of $100 million and $30 million in perpetual debt in its capital structure. Barings' cost of equity is 15% and its cost of debt is 10%. Expected perpetual net operating income (EBIT) will be $17 million and the marginal tax rate is 40%.
A) $86.0 million
B) $104.0 million
C) $98.0 million
D) $92.7 million
Q2) Generally the ____ a firm's business risk, the ____ the amount of financial leverage that will be used in the optimal capital structure.
A) greater, greater
B) smaller, less
C) greater, less
D) smaller, greater
Q3) The use of fixed-cost financing sources is referred to as the use of
A) operating leverage
B) a leveraged buyout
C) financial leverage
D) combined leverage
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) ASG expects next year's operating income (EBIT) to equal $22 million, with a standard deviation of $16 million. The coefficient of variation of operating income is equal to 0.73. Interest expenses will be $9 million next year and debt retirement will require a principal payment of $2.5 million. ASG's marginal tax rate is 40%. If EBIT is normally distributed, what is the probability that ASG will have a negative EPS next year?
A) 20.9%
B) 25.5%
C) 23.3%
D) 25.8%
Q2) To balance the operating and financial risks that are so variable for a multinational company, Nestle allows its foreign operating subsidiaries ____ operational flexibility and follows a ____ financing strategy.
A) decentralized, centralized
B) centralized, centralized
C) centralized, decentralized
D) decentralized, decentralized
Q3) Explain the difference between short-run costs and long-run costs.
Q4) In what way does management's willingness to assume risk impact the firm?
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Page 18
Chapter 15: Dividend Policy
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Sample Questions
Q1) Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next year. Peterson currently has 5,000,000 shares of common stock outstanding. The company's capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget.
A) $15,000,000
B) 0
C) $5,000,000
D) cannot be determined
Q2) The fundamental question in dividend policy is
A) the tax consideration
B) the amount of growth the firm considers optimal
C) not violating any restrictive covenants
D) determining what portion of earnings will be paid out
Q3) Explain the "clientele effect".
Q4) What is the signaling effect of dividend payments?
Q5) What are the procedures for repurchasing stock?
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Chapter 16: Working Capital Policy and Short-term Financing
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Sample Questions
Q1) A firm's working capital position is important since::
A) it is a measure of risk.
B) it is a measure of efficiency.
C) it is much more in demand due to its scarcity.
D) it reflects the amount of short-term liabilities that the firm must consider.
Q2) Efficient current assets management refers to the firm's ability to economize on which of the following?
I. Inventory
II. Marketable securities
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) Why is working capital so important to a firm's continued profitability?
Q4) When the level of working capital is increased, all of the following are expected to occur except
A) expected profitability decreases
B) expected profitability increases
C) risk decreases
D) none of the above
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Cash management involves the determination of:
A) the best locations for lockboxes
B) setting up decentralized collection centers
C) both a and b
D) neither a nor b
Q2) Which of the following types of marketable securities normally has the lowest yields?
A) Federal agency issues
B) Treasury bills
C) repurchase agreements
D) commercial paper
Q3) In general the ____ the number of checks being handled and the ____ the dollar amount of each check, the greater the benefit of a lockbox arrangement is to a firm.
A) smaller, greater
B) greater, smaller
C) greater, greater
D) smaller, smaller
Q4) When and why is it best to use lockboxes? Explain when should alternative methods be used.
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Chapter 18: Management of Accounts Receivable and Inventories
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Sample Questions
Q1) Technico manufactures about 800,000 solar calculators per year. The computer chip used in the calculator cost $4.80 each and the cost of placing an order is $65. If the carrying costs are 16%, what is the EOQ for the chips.
A) 25,495
B) 3,162
C) 8, 229
D) 11,637
Q2) All other things being equal, the application of a seasonal dating to the terms of credit offered by the firms below would be expected to generate additional sales for each firm except
A) a Christmas novelty manufacturer
B) an agricultural implements manufacturer
C) a wholesale frozen food supplier
D) a swimsuit manufacturer
Q3) Safety stock is needed to absorb
A) changes in accounts receivables
B) cyclical changes
C) random fluctuations in sales
D) annual model changes
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Chapter 19: Lease and Intermediate-term Financing
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Q1) Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. Under terms of the lease, payments will be made at the beginning of each of the 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lease payment that Wrenn will require from Daymark? Assume a marginal tax rate of 40%.
A) $11,066
B) $18,443
C) $20,656
D) $12,393
Q2) Ajax Capital has determined that the amount to be amortized on an extruder is $540,000. What annual lease payment must Ajax (lessor) require from the lessee if the required rate of return is 16%? Assume that the lease payments will be made at the beginning of each of the 7 years of the lease agreement and that the marginal tax rate is 40%.
A) $288,140
B) $222,827
C) $115,256
D) $192,093
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Page 23
Chapter 20: Financing With Derivatives
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Q1) The ____ is the price that the call option buyer pays the writer of the option if the buyer decides to exercise the option.
A) option premium
B) option discount
C) conversion price
D) exercise price
Q2) ____ earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares.
A) Primary
B) Full primary
C) Fully diluted
D) First class
Q3) The ____ the time remaining before an option expires, the ____ the option value.
A) longer, lower
B) shorter, higher
C) longer, higher
D) shorter, lower
Q4) Which companies are the primary issuers of convertible securities and why do they do it?
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Chapter 21: Risk Management
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Q1) List several reasons why a firm may choose to employ risk management techniques.
Q2) When a lack of information can result in business risk, management can do all of the following to acquire additional information EXCEPT:
A) Refer to the annual reports of competitors for needed information.
B) Purchase information from those that possess the knowledge needed.
C) Form a panel to evaluate the product
D) Test market a product
Q3) To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?
A) Manufacture the product overseas.
B) Develop more raw material suppliers.
C) Test-market a product.
D) Change advertising.
Q4) A "clearinghouse" operated by the futures exchange handles:
A) the offices of the future contract buyers.
B) the location of the future contract sellers.
C) the payments between buyers and sellers.
D) the actual products bought and sold.
Q5) How does hedging reduce or eliminate business risks?
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Chapter 22: International Financial Management
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Q1) What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?
A) 0.43%
B) 1.50%
C) 6.35%
D) 1.46%
Q2) When interest rate parity exists, the forward rate will differ from the spot rate by just enough to ____.
A) offset the difference in the real rate of return
B) permit the buyer of a covered option to make a profit
C) offset the interest rate differential between the two currencies
D) result in a perfect interest rate arbitrage
Q3) Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?
A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
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Chapter 23: Corporate Restructuring
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Q1) The ____ is the number of acquiring company shares received per share of acquiring company stock owned.
A) stock equity ratio
B) exchange ratio
C) dividend exchange ratio
D) interest parity ratio
Q2) An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or investor who initiated the unfriendly takeover is:
A) pacman defense
B) boardmail
C) white squire
D) greenmail
Q3) Employee Stock Ownership Plans (ESOPs) are useful instruments for financing leveraged buyouts because in an ESOP transaction
A) employees have a greater voice in the final decision
B) lenders can offer below market interest rates
C) ESOPs can be used only when employees take over management functions
D) ESOPs attract greater external equity investments
Q4) How does a joint venture differ from a holding company?
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Chapter 24: Continuous Compounding and Discounting
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Q1) Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you?
A) 12.68%
B) 10.00%
C) 10.47%
D) 10.83%
Q2) The nominal interest rate and the effective interest rate are equivalent when compounding occurs:
A) once a year at the end of the year.
B) every quarter.
C) semiannually.
D) monthly.
Q3) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate?
A) 7.25%
B) 6.77%
C) 7.32%
D) 7.00%
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) Casa Chica is considering replacing a piece of equipment. Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years. Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years. If Chica's cost of capital is 13 percent, which alternative should be chosen using the equivalent annual annuity method?
A) Project A
B) Project B
C) Indifferent between the two projects
D) Neither, because both projects have a negative NPV
Q2) Lakeland Ramblers is considering two mutually exclusive projects to boost their tourist revenue. Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years. Project B cost $100,000 and will produce annual net cash flows of $25,000 for 10 years. If Lakeland's cost of capital is 12%, which project should be chosen using the equivalent annual annuity method?
A) Project A, NPV is $17,941 higher
B) Project B, NPV is $11,125 higher
C) Project A, NPV is $28,383 higher
D) Project B, NPV is $21,567 higher
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Chapter 26: Breakeven Analysis
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Q1) How can a firm have more than one breakeven output point?
Q2) In a graphic breakeven analysis, the point where total revenue is less than total cost indicates that the firm has:
A) net operating capital
B) cash flow from investing
C) a negative EBIT
D) a positive return on capital
Q3) List the limitations of breakeven analysis:
Q4) The contribution margin per unit is the difference between:
A) the selling price per unit and fixed costs
B) the fixed costs and the variable costs
C) the variable cost per unit and the selling price per unit
D) the variable costs and the number of units sold
Q5) Breakeven analysis can be used:
A) when planning renovations
B) when planning expansions
C) when planning financial resources
D) when planning new product development
Q6) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
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Chapter 27: Bond Refunding Analysis
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Source URL: https://quizplus.com/quiz/3399
Sample Questions
Q1) Cutech issued a $150 million of a 20-year, 10.5% debt 5 years ago. Since then, Cutech's financial conditions have improved and management believes that they could refund the old issue with a new 15-year, 7.5% issue. The old debt is now callable at 104 percent of par and issuance costs on the new issue would be 0.6 percent. The unamortized issuance costs on the old issue are $675,000. If Cutech calls the old issue and refunds it, both issues would be outstanding for a two-week period. If the company's marginal tax rate is 40%, should Cutech refund the old issue?
A) Yes, NPV = $43,645,599
B) Yes, NPV = $43,798,975
C) Yes, NPV = $44,364,538
D) No, NPV is negative
Q2) When considering bond refunding, all of the following are important input items
EXCEPT:
A) interest payments of old issue
B) weighted cost of capital
C) interest payments of new issue
D) after-tax cost of debt
Q3) Why would a corporation consider bond refunding?
Q4) Why is the after-tax cost of debt used in bond refunding analysis?
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Chapter 28: Taxes
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/3398
Sample Questions
Q1) For most large U.S. corporations, the maximum capital gain tax rate is
A) 14%
B) 35%
C) 50%
D) 28%
Q2) AMX corporation had operating income of $420,000 in 2010; received $12,000 in interest income; paid $22,000 in interest; received $20,000 in dividends; and paid $50,000 in dividends. What is the tax liability for AMX?
A) $141,440
B) $146,200
C) $148,920
D) none of the above
Q3) Corporate capital gains income is currently taxed at ____ ordinary income.
A) 80 percent of the marginal tax rate on
B) the same marginal rate as
C) 50 percent of the marginal tax rate on
D) none of the above
Q4) How are dividends received by a corporation treated for tax purposes?
Q5) How does a tax loss affect a corporation as it applies to past and future income?
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