Financial Decision Making
Test Bank
Course Introduction
Financial Decision Making explores the principles, frameworks, and analytical tools that guide individuals and organizations in making sound financial choices. The course covers core topics such as time value of money, risk and return, capital budgeting, financial statement analysis, and investment appraisal. Students learn how to assess financial options, evaluate the merits and drawbacks of various financing sources, and make informed decisions under uncertainty. Case studies and real-world scenarios provide practical insights into budgeting, forecasting, and strategic planning, equipping students with the skills necessary to optimize financial performance and support effective organizational growth.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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16 Chapters
1175 Verified Questions
1175 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements is true of a hostile takeover?
A) A hostile takeover results when a management wants the firm to be taken over.
B) A hostile takeover occurs when a firm's stock is undervalued relative to its potential.
C) A hostile takeover retains the managers of the acquired firm at their previous positions.
D) A hostile takeover refrains managers to take actions that maximize stock prices.
E) A hostile takeover results in poor management and inefficient operations.
Answer: B
Q2) If a limited liability company (LLC) is taxed like a partnership, _____.
A) income passes through to the owners
B) income is taxed twice
C) the owners have unlimited tax liability
D) the shareholders pay tax on dividends received by them
E) dividends are taxed on capital gain rate
Answer: A
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3
Chapter 2: Analysis of Financial Statements
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Q1) Which of the following was created to develop and approve a set of common International Financial Reporting Standards (IFRS)?
A) International Accounting Standards Board (IASB)
B) Securities and Exchange Commission (SEC)
C) Generally Accepted Accounting Principles (GAAP)
D) International Federation of Accountants
E) International Accounting Standards Committee
Answer: A
Q2) Retained earnings is the total amount of:
A) income that is distributed as dividends to the shareholders.
B) debt not repaid in the current year.
C) depreciation charged on the firm's assets.
D) income that is saved and reinvested in assets.
E) profit retained by a firm to pay taxes.
Answer: D
Q3) The book value of shares are often equal to their market value.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.
A)True
B)False
Answer: False
Q2) Which of the following financial intermediaries operates as a not-for-profit organization?
A) Commercial bank
B) Credit union
C) Thrift institution
D) Mutual fund
E) Whole-life insurance company
Answer: B
Q3) The mandatory trade-through rule followed for trading in securities leads does not work to the benefit of the shareholders.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)
A) $11,125.76
B) $11,857.58
C) $12,580.20
D) $13,422.50
E) $14,871.32
Q2) Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is
A) $1,918
B) $1,855
C) $2,097
D) $2,355
E) $1,784
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Q1) A foreign trade deficit occurs when a country's:
A) imports are greater than its exports.
B) tax revenue is greater than its expenditure.
C) savings rate is higher than its borrowing rate.
D) purchase of Treasury securities is more than sale of Treasury securities.
E) cash reserves are higher than the expenses.
Q2) Bonds with higher liquidity have to offer higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.
A)True
B)False
Q3) If you have information that a recession is ending, and the economy is about to enter a boom, and your firm needs to borrow money, it should probably issue long-term rather than short-term debt.
A)True
B)False
Q4) The higher the perceived risk, the higher the required rate of return.
A)True
B)False
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Sample Questions
Q1) Municipal bonds are issued by:
A) financial institutions.
B) state and local governments.
C) commercial banks.
D) the federal government.
E) non-governmental organizations.
Q2) A firm's rating by a rating agency is based on:
A) the firm's ratio of debt to total assets.
B) the dividends paid in the last year by the firm.
C) the earnings per share of the shareholders of subsidiary firms.
D) exchange rate fluctuations of the U.S Dollar and Euro.
E) no precise formula.
Q3) In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.
A) debenture
B) income bond
C) indenture
D) subordinated debenture
E) mortgage bond
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Page 8
Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) When using the Dividend Discount Model, assuming that growth (g) will remain constant, under which of the following circumstances will the dividend yield be equal to the required return on a common stock (rs)?
A) g = 0
B) g > 0
C) g < 0
D) g = rs
E) g > rs
Q2) Which of the following is considered a hybrid security?
A) Corporate bonds
B) Preferred stock
C) Founders' shares
D) Foreign equity
E) Growth stock
Q3) A convertibility provision gives the issuing corporation the right to call in the preferred stock for redemption.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Which of the following risks is relevant for the purpose of determining the risk premium of a security?
A) Financial risk
B) Inflation risk
C) Default risk
D) Stand-alone risk
E) Business risk
Q2) Which of the following pairs of risks have both the components referring to the same kind of risk?
A) Market risk and unsystematic risk
B) Market risk and relevant risk
C) Firm-specific risk and nondiversifiable risk
D) Firm-specific risk and systematic risk
E) Firm-specific risk and market risk
Q3) Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
A)True
B)False
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10
Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Project A has a cost of $1,000, and it will produce end-of-year net cash inflows of $500 per year for 3 years. The project's required rate of return is 10 percent. What is the difference between the project's IRR and its MIRR? (Round off the answer to two decimal places.)
A) 3.88%
B) 4.31%
C) 5.09%
D) 5.75%
E) 6.21%
Q2) A firm's effective capital budgeting procedures result in:
A) lower net present values (NPVs).
B) a higher stock price.
C) a higher expected rate of return.
D) lower internal rates of return.
E) a higher number of projects having multiple internal rates of return.
Q3) The modified IRR (MIRR) method has wide appeal to academics, but most business executives prefer the NPV method to either the regular or modified IRR.
A)True
B)False
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Page 11
Chapter 10: Project Cash Flows and Risk
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Q1) If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
A) If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
B) If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
C) If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
D) If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
E) If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) Alpha Inc.'s beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Which of the following is Alpha's cost of retained earnings using the capital asset pricing model (CAPM) approach?
A) 8 percent
B) 10 percent
C) 12 percent
D) 14 percent
E) 16 percent
Q2) Smith and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm expects to retain $15,000 in earnings over the next year. Where will a break in the WACC curve occur?
A) $12,500
B) $15,000
C) $30,000
D) $25,000
E) $42,500
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Chapter 12: Capital Structure
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Q1) It is easy to determine how P/E ratios are affected by the degree of financial leverage (DFL).
A)True
B)False
Q2) According to the signaling theory, why will a firm with unfavorable prospects want to sell stock?
A) To share the losses with new investors
B) To increase bankruptcy cost with more debt
C) To skip the dividends payable on common stock
D) To maintain a reserve borrowing capacity
E) To have tax benefit/bankruptcy cost trade-off
Q3) According to the trade-off theory, which of the following is the least expensive form of financing?
A) Common stock
B) Preferred stock
C) Corporate debt
D) Retained earnings
E) Government subsidies
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) The theory that investors regard dividend changes as signals of management's earnings forecasts is called the _____.
A) information content hypothesis
B) dividend relevance theory
C) clientele effect
D) free cash flow hypothesis
E) residual dividend policy
Q2) A_____ is an action taken by a firm to decrease the per-share price of its stock.
A) stock appreciation
B) stock split
C) stock issue
D) stock repurchase
E) stock redemption
Q3) According to the information content hypothesis, a lower-than-expected dividend increase, or an unexpected reduction, generally would result in a price decline.
A)True
B)False
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Page 15
Chapter 14: Managing Short-Term Financing Liabilities
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Q1) The following information relates to Zync Corporation. Current assets $200,000
Current liabilities $150,000
Long-term assets $600,000
Long-term liabilities $400,000
Based on this information, the net working capital of the company is:
A) $200,000.
B) $50,000.
C) $350,000.
D) $10,000,000.
E) $600,000.
Q2) A revolving credit agreement is:
A) created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations.
B) the credit created when one firm buys on credit from another firm.
C) an outright sale of receivables.
D) an unsecured, short-term promissory note issued by large, financially sound firms to raise funds.
E) a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
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Page 16
Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) A restricted current asset investment policy will cause a firm to hold maximum levels of safety stocks for cash and inventories, and to have a liberal credit policy.
A)True
B)False
Q2) _____ increase the prices of products that are allowed to be imported.
A) Stockouts
B) Tariffs
C) Quotas
D) Discounts
E) Expropriations
Q3) Firms following a restricted current asset investment policy:
A) have uncertain sales and operations.
B) have relatively low levels of accounts receivable.
C) have a lower return on investment, especially on current assets.
D) have the longest cash conversion cycle in the industry.
E) have the highest inventory conversion in the industry.
Q4) Money market instruments are held as marketable securities.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Q1) A firm needs external financing to support increases in operations if:
A) the firm is operating at full capacity.
B) the firm is accounting for a very less amount of financing feedbacks.
C) the firm has a large amount of spontaneously generated funds.
D) the firm is having economies of scale.
E) the firm is operating at the breakeven point.
Q2) At the financial control phase, a firm is concerned with:
A) the amount of funds generated internally.
B) determining how much money it will need during a given period.
C) determining its financial breakeven point.
D) the degree of financial leverage that is acceptable.
E) implementing financial plans and dealing with feedback.
Q3) Operating breakeven analysis determines:
A) the minimum value of assets that a firm should hold to achieve profitability.
B) the maximum amount of the total assets to be financed by debt.
C) the minimum earnings to be retained and the earnings to be paid as dividends.
D) the level of capacity utilization required to achieve the forecasted sales level.
E) the level of sales of a new product required to achieve profitability.
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Page 18