Financial Decision Making Review
Questions
Course Introduction
Financial Decision Making explores the critical concepts, tools, and techniques used to analyze and make sound financial decisions within organizations and personal finance contexts. The course covers topics such as financial statement analysis, capital budgeting, risk assessment, time value of money, cost of capital, and financing options. Students will learn how to apply quantitative methods and financial theory to evaluate investment opportunities, manage assets and liabilities, and understand the impacts of market conditions on financial choices. Throughout the course, real-world case studies and practical exercises are utilized to develop decision-making skills crucial for effective financial management.
Recommended Textbook
Introduction to Corporate Finance 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) What recent act has attempted to reduce the possibility of more accounting scandals in our economy?
A) Tax Relief Act of 2003
B) Internal Accounting Standards Act of 2002
C) McCain-Feingold Act of 2003
D) Sarbanes-Oxley Act of 2002
Answer: D
Q2) Which of the following represents career opportunities in finance?
A) Corporate finance
B) Investment banking
C) Consulting
D) All of the above
Answer: D
Q3) What are the responsibilities of the board of directors in a corporation?
A) Hire and fire managers.
B) Manage day-to-day operations.
C) Amend the firm's corporate charter when necessary.
D) Hire and fire entry level employees.
Answer: A
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Page 3
Chapter 2: Financial Statement and Cash Flow Analysis
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Sample Questions
Q1) Accountants:
A) generally construct financial statements using the cash-based approach
B) generally construct financial statements using the accrual-based approach
C) must apply Generally Accepted Accounting Principles to fairly portray how the firm has performed in the past
D) must apply Generally Accepted Accounting Principles to fairly portray how the firm will perform in the future
E) both (b)and (c)
Answer: E
Q2) Refer to Exhibit 2-1.Big Diesel Incorporated currently predicts taxable income of $200,000 for the next year.If this is their actual income,what will be the tax liability for Big Diesel?
A) $45,250
B) $56,500
C) $61,250
D) $91,650
Answer: C
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Chapter 3: The Time Value of Money
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Sample Questions
Q1) If you invest $2,500 in a bank account that pays 6% interest compounded monthly,how much will you have in five years?
A) $1,853.43
B) $3,345.56
C) $2,505.20
D) $3,372.13
Answer: D
Q2) You want to buy a new car.The car you picked will cost you $32,000 and you decide to go with the dealer's financing offer of 5.9% compounded monthly for 60 months.Unfortunately,you can only afford monthly loan payments of $300.However,the dealer allows you to pay off the rest of the loan in a one time lump sum payment at the end of the loan.How much do you have to pay to the dealer when the lump sum is due?
A) $14,000.00
B) $21,890.43
C) $25,455.37
D) $22,071.75
Answer: D
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Page 5
Chapter 4: Valuing Bonds
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Sample Questions
Q1) You own a bond that pays a 12% annualized SEMIANNUAL coupon rate.The bond has 10 years to maturity.If the discount rate suddenly moves from 14% to 16%,then what is the dollar increase (decrease)in value for the bond?
A) ($90.42)
B) ($89.01)
C) $89.01
D) $90.42
Q2) You have the choice between investing in a corporate bond with a yield of 8% or a municipal bond.If your marginal tax rate is 28%,what should be the yield on the municipal bond in order to be competitive?
A) 8.00%
B) 5.76%
C) 11.11%
D) 13.69%
Q3) Unsecured bonds that have legal claims inferior to other outstanding bonds are
A) debentures.
B) mortgage bonds.
C) subordinated debentures.
D) discount bonds.
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Page 6
Chapter 5: Valuing Stocks
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Sample Questions
Q1) Miller Juice,Inc.is not paying a dividend right now,but is expected to pay a $4.56 dividend two years from now.Investors expect that dividend to grow by 4% every year forever.If the required return on the stock investment is 14%,what should be the price of Miller Juice stock today?
A) $53.69
B) $36.49
C) $47.42
D) $43.84
Q2) Suppose you want to buy ABC and hold it for the next 4 years.What would the selling price be for ABC in 4 years,assuming that none of our assumptions change?
A) $28.01
B) $28.76
C) $29.40
D) $30.80
Q3) Which of the following stock exchanges has the most strict listing requirements?
A) American Stock Exchange
B) NASDAQ
C) New York Stock Exchange
D) Pacific Stock Exchange
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Page 7
Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) A normal distribution is ____.
A) skewed
B) symmetrical
C) uniform
D) all of the above
E) none of the above
Q2) What is the average return of a portfolio that has 30% invested in stock A,30% invested in stock B and 40% invested in stock C?
A) 9.92%
B) 12.6%
C) 7.59%
D) 13.8%
Q3) What do you call the portion of your total return on a stock investment that is caused by an increase in the value of the stock.
A) Dividend yield.
B) Risk-free return.
C) Capital gain.
D) None of the above.
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8
Chapter 7: Risk,return,and the Capital Asset Pricing Model
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Sample Questions
Q1) Given Exhibit 7-3,what is the weight of Security 2?
A) 20%
B) 40%
C) 60%
D) 80%
Q2) The idea that asset prices fully reflect all available information is known as the:
A) fair price hypothesis.
B) efficient market hypothesis.
C) full information hypothesis.
D) full price hypothesis.
Q3) The risk-free rate is 5% and the expected return on the market portfolio is 13%.A stock has a beta of 1.5,what is its expected return?
A) 17%
B) 12%
C) 19.5%
D) 24.5%
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) You must know all the cash flows of an investment project to compute its
A) NPV,IRR,PI,and discount payback period
B) NPV,IRR,PI,payback period,and discount payback period,
C) NPV,PI,IRR
D) NPV,accounting rate of return,IRR,PI
Q2) Refer to NPV Profile.If Gamma Company has a hurdle rate of 11%,and the two projects are independent,which project should Gamma Company invest?
A) Project 1
B) Project 2
C) Both project 1 and project 2.
D) Neither project
Q3) As the discount rate increases,the IRR of a project:
A) increases.
B) decreases.
C) is unaffected.
D) cannot be determined with out knowing the discount rate.
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10
Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) The ____ makes capital budgeting ____ complicated. A) human element,less
B) human element,more
C) human analysis,more
D) human analysis,less
Q2) A machine costs $3 million and has zero salvage value.Assume a discount rate of 10% and a 40% tax rate.The machine is depreciated straight-line over 3 years for tax purpose.What is the present value of depreciation tax savings associated with this machine?
A) $1,200,000
B) $994,741
C) $1,090,900
D) $400,000
Q3) A project will generate a real cash flow three years from now of $100,000.If the nominal discount rate is 10% and expected inflation is 3%,what is the nominal cash flow for year 3?
A) $112,551
B) $106,090
C) $109,273
D) $122,504
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Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) A firm has a capital structure of 40% debt and 60% equity.Debt can be issued at a return of 10%,while the cost of equity for the firm is 15%.The firm is considering a $50 million expansion of their production facility.The project has the same risk as the firm overall and will earn $12 million per year for 6 years.What is the NPV of the expansion if the tax rate facing the firm is 40%?
A) -$0.4 million
B) -$0.2 million
C) $0 million
D) $0.2 million
Q2) Miller's Dairy Products reported sales of $1.5 million in 2002 and $2.25 million in 2003.Their EBIT in 2002 was $550,000 and in 2003 the EBIT rose to $925,000.What is the company's operating leverage?
A) 2.36
B) 1.36
C) 1.96
D) 2.86
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Page 12
Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) Bavarian Brewhouse is planning on going public.Under the underwriting agreement the underwriting discount is $1.25 per share.If the offering price of the stock is set at $12.50 per share,what is the percentage underwriting discount?
A) 8%
B) 9%
C) 10%
D) 11%
Q2) Which of the following factors might be most important for an entrepreneur that is considering an IPO in an industry where a firm's strategy is its most important asset.
A) the use of stock as a compensation vehicle
B) the investment banking fee
C) the disclosure requirements of publicly traded firms
D) all of the above are most import to such a firm
Q3) What are the total underwriting fees for this Bavarian Brewhouse IPO?
A) $18 million
B) $7 million
C) $25 million
D) $10 million
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) A graphical representation of The Trade-Off Model is shown.Various components of the graph are labeled.Which of the following corresponds to line 5?
A) Present value of interest tax shields on debt
B) Present value of expected bankruptcy and agency costs
C) Value of levered firm with bankruptcy costs
D) Value of levered firm in the absence of bankruptcy and agency costs
E) Value of firm under all-equity financing
Q2) DebtCo.has $100,000,000 of perpetual debt outstanding with a cost of 9%.DebtCo.is currently subject to a 30% marginal tax rate.If a new president is elected who surprisingly announces that firms like DebtCo.will now be subject to a 35% marginal tax rate,what should be the effect of the immediate value change on DebtCo.?
A) -$35,000,000
B) -$5,000,000
C) $5,000,000
D) $35,000,000
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) Which of the following is not an example of a negative covenant?
A) Borrowers may not sell accounts receivable to generate cash.
B) The borrower is required to maintain a minimum level of net working capital.
C) Constraints associated with fixed assets regarding the liquidation,acquisition and encumbrance.
D) Constraints associated with consolidation,merging or combining with another firm.
E) All of the above are examples of negative covenants.
Q2) Refer to BLEC.What is the present value of the five years of after-tax cash flows from purchasing the machine?
A) $92,504
B) $108,120
C) $77,351
D) $123,273
Q3) Refer to Bavarian Brew Bond.What is the NPV of the proposed bond refinancing?
A) $907,484
B) -$907,484
C) -$895,453
D) $895,453
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Chapter 14: Payout Policy
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Sample Questions
Q1) Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and follows a constant nominal payout policy,its dividend will be
A) $3.30
B) $3.00
C) $2.20
D) $2.00
Q2) In perfect capital markets,
A) dividends are irrelevant because investors can costlessly create any payout pattern desired.
B) dividends are irrelevant because firms have more investment opportunities for free cash flow.
C) dividends are irrelevant because investors prefer certainty.
D) none of the above are true.
Q3) What was Bavarian Brewhouse's dividend payout ratio in 2004?
A) .58
B) .62
C) .35
D) .42
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) Kooshy Company wishes to maintain its dividend policy in the upcoming year.What will be the pro forma addition to retained earnings if sales are forecasted to increase 20% and all costs are proportional to sales?
A) $5
B) $37
C) $50
D) $45
Q2) Consider the cash receipts projections of Roxy Inc.that is developing a cash budget for October ,November and December; sales in August and September were $600,000 and $500,000 respectively.The forecast sales are $400,000,$300,000 and $200,000 for October,November and December respectively.20 % of sales are cash sales and 80% are credit sales; collects about 70% of each month's sales in the next month but waiting until the following month for the remaining 10% of sales.Bad debts are negligible.The Firm is expectsing cash dividend of $10,000 in December from a subsidiary.What are the accounts receivable collected in October? (In thousands)
A) $410
B) $490
C) $350
D) $390
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Page 17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) The schedule that indicates the portions of the total accounts receivable balance that have been outstanding for specified periods of time is known as the
A) payment pattern monitoring.
B) aging of accounts receivable.
C) credit scoring.
D) just-in-time system.
E) none of these
Q2) Louis International is considering easing credit standards to increase sales,and potentially profits.Currently the firm sells 200,000 units at a sales price of $125 per unit and variable cost of $103 per unit.Currently the average collection period is 15 days and the bad debt expense is 3% of sales.The required return on investment is 18%.If credit standards are eased,the sales will increase to 250,000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 5% All else will remain the same.What is the new investment in investment in accounts receivable?
A) $493,835.62
B) $2,996,575.34
C) $1,975,342.47
D) $2,469,178.08
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Chapter 17: Cash, payables, and Liquidity Management
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Sample Questions
Q1) The primary purpose of the accounts payable function
A) is to examine all incoming invoices and determine the proper amount to be paid.
B) is to generate float for the firm.
C) is to pay invoices as soon as possible.
D) none of the above.
Q2) The purpose of a "positive pay" service is to
A) reduce availability and clearing float
B) only clear checks when a firm's cash balance is positive.
C) reduce a firm's exposure to check fraud.
D) move funds to into a zero balance account.
Q3) Your cost of capital is 16% and you are offered credit terms of 1/10 net 60.Do you take the discount or not and why?
A) you take the discount because 7.37% is less than 16%
B) you do not take the discount because 7.37% is less than 16%
C) you take the discount because 23.37% is greater than 16%
D) you do not take the discount because 7.37% is less than 16% .
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Chapter 18: International Financial Management
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Q1) Which of the following statements is true?
A) Speculators do irreparable harm in general to the foreign exchange market.
B) Speculators help make the foreign currency market more liquid and more efficient.
C) Speculators help make the foreign currency market less liquid and less efficient.
D) Governments that attempt to maintain a fixed exchange rate must generally intervene less frequently than those that have floating exchange rates.
Q2) The annualized rate of interest on three-month government bonds is 7% in Italy and the annualized rate on three-month government bonds is 4% in the United States.The current spot rate is $1.12/ .Using interest rate parity what is the implied three-month forward rate between the U.S.dollar and the Euro.
A) $1.112/
B) $1.128/
C) 0.8865/$ D) $1.0886/
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Chapter 19: Options
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Sample Questions
Q1) Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $15 and currently sells at $4.50.What is the time value of the option?
A) $2.50
B) $0
C) $2.00
D) $4.50
Q2) Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option.If the price of Smith stock is $56,what is your net profit (or loss)? Ignore transaction costs.
A) $0
B) $12.50
C) -$27.50
D) $40
Q3) One of the main reasons for the name "derivatives" is that
A) the value of the underlying instrument derives its value from the derivative instrument.
B) the instruments derive their value from the value of other instruments.
C) calculus is required to convert their market price to a dollar price.
D) none of the above.
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Sample Questions
Q1) Which of the following is the most likely method of financing for a high technology entrepreneurial firm?
A) equity
B) mortgage bonds
C) debentures
D) junk bonds
Q2) Give the venture capitalists the right to force the company to buy back the shares held by the venture capitalists.
A) Repurchase rights
B) Stock option plans
C) Demand registration rights
D) Participation rights
Q3) Venture Fund A focuses on start up technology companies while Venture Fund B focuses on middle-stage technology companies.Which firm would require the highest returns on its investments?
A) Venture Fund A
B) Venture Fund B
C) venture funds require the same return
D) it is impossible to say which firm would require the highest return
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Page 22
Chapter 21: Mergers, acquisitions, and Corporate Control
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Sample Questions
Q1) Legislation intended to prevent mergers that are deemed to have anti-competitive effects on the business environment is termed:
A) Sherman Legislation
B) Antitrust
C) Anticompetitiveness legislation
D) Tightness legislation
Q2) Which of the following statements is false?
A) Most acquisitions are hostile.
B) Even is a bid is considered hostile,ultimately over half of those bids are successful.
C) Hostile takeovers peaked in the 1980s.
D) Hostile takeovers are more rare in other countries than they are in the United States.
Q3) Value-creating benefits of increased breadth of operations for merged companies
A) economies of scale
B) economies of scope
C) resource complementarities
D) synergy
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Chapter 22: Bankruptcy and Financial Distress
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Sample Questions
Q1) If a company's financial position is characterized by current liabilities greater than current assets,it is
A) bankrupt.
B) illiquid.
C) insolvent.
D) liquidated.
Q2) For Case II,what settlement will the accounts payable holders receive?
A) $3 million
B) $3.34 million
C) $4.65 million
D) $6 million
Q3) A voluntary reorganization of debts whereby a firm's debt obligations are reorganized according to a creditors pro-rata share of the debting firm's total debt,is called
A) a composition.
B) an extension.
C) creditor control.
D) none of the above.
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Chapter 23: Risk Management
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Q1) Refer to Exhibit 23-2.For purposes of marking to market,what is the current price of coffee futures for December?
A) $41,625
B) $53,625
C) $41,250
D) $43,500
Q2) Which of the following is NOT a motivation for hedging?
A) Reducing the costs of financial distress
B) Enhancing the ability to evaluate managers
C) Offsetting the costs of insurance
D) Reducing the firm's expected tax liability
Q3) What is MakeStuff's expected after tax earnings if it remains unhedged?
A) $50,000
B) $42,500
C) $80,000
D) $40,833
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