Financial Decision Making
Test Preparation
Course Introduction
Financial Decision Making is a course designed to equip students with the analytical tools and critical thinking skills necessary to evaluate financial information and make sound business decisions. Through the exploration of core concepts such as time value of money, capital budgeting, risk assessment, and financial statement analysis, students will learn how to apply quantitative methods to real-world scenarios. Emphasis is placed on understanding the financial implications of strategic choices, interpreting financial market data, and leveraging financial models to support organizational and personal financial planning. This course prepares students to make informed financial decisions within both corporate and individual contexts.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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1604 Verified Questions
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Agency costs refer to:
A)corporate income subject to double taxation.
B)the total dividends paid to stockholders over the lifetime of a firm.
C)the costs of any conflicts of interest between stockholders and management.
D)the costs that result from default and bankruptcy of a firm.
E)the total interest paid to creditors over the lifetime of the firm.
Answer: C
Q2) 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
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Pete's Boats has beginning long-term debt of $180 and ending long-term debt of $210.The beginning and ending total debt balances are $340 and $360,respectively.The interest paid is $30.What is the amount of the cash flow to creditors?
A)-$10
B)$0
C)$10
D)$40
E)$50
Answer: B
Q2) Peggy Grey's Cookies has net income of $360.The firm pays out 50 percent of the net income to its shareholders as dividends.During the year,the company sold $44 worth of common stock.What is the cash flow to stockholders?
A)$64
B)$136
C)$144
D)$224
E)$296
Answer: B
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) The Uptowner has $956,400 in sales.The profit margin is 4.75 percent.There are 25,000 shares of stock outstanding with a market price per share of $32.40.What is the price-earnings ratio?
A)8.47
B)5.89
C)21.09
D)17.83
E)13.64
Answer: D
Q2) A firm has 5,000 shares of stock outstanding with a market value of $23.60 a share,$74,800 of long-term debt with an interest rate of 7.5 percent,cash on hand of $6,400,sales of $198,000,costs of $107,200,and depreciation of $13,400.The tax rate is 35 percent.What is the enterprise value multiple?
A)2.05 times
B)3.97 times
C)2.19 times
D)4.18 times
E)3.10 times
Answer: A
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) 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.
Q2) Jennings Lumber just paid an annual dividend of $1.20 a share.The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent.Which one of these is the correct formula for computing the current value of this stock?
A)$1.20 + [$1.20/1.13 + .02]
B)($1.20 × 1.02)/1.13
C)($1.20 × 1.02)/.13
D)($1.20 × 1.02)/(.13 - .02)
E)$1.20 + ($1.20 × 1.02)/(.13 - .02)
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.
Q4) What circumstances are required for an APR to equal an EAR?
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) Which of the following are common characteristics of floating-rate bonds?
I.Adjustable coupon rates
II.Adjustable maturity dates
III.Put provision
IV.Coupon cap
A)I and II only
B)II and III only
C)I,II,and IV only
D)I,III,and IV only
E)I,II,III,and IV
Q2) All else constant,a coupon bond that is selling at a premium,must have:
A)a yield to maturity that is less than the coupon rate.
B)a coupon rate that is equal to the yield to maturity.
C)a market price that is less than par value.
D)semiannual interest payments.
E)a coupon rate that is less than the yield to maturity.
Q3) Assume you are the manager of a multi-million dollar portfolio of corporate bonds and you believe interest rates will rise in the near future.Other investors have not yet accepted your belief but you want to act based on your personal beliefs.What adjustments should you make to the portfolio?
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Chapter 6: Stock Valuation
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Sample Questions
Q1) Last week,Railway Cabooses paid its annual dividend of $1.20 a share.The company has been reducing its dividends by 6 percent each year.What is one share of stock worth at a required return of 14 percent?
A)$8.06
B)$5.64
C)$10.80
D)$14.10
E)$15.90
Q2) New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.50 each year for the next three years.In Year 5,it will pay a final liquidating dividend of $22 a share.If the required return is 16 percent,what is the current per share value of this stock?
A)$12.83
B)$13.08
C)$9.80
D)$14.13
E)$15.86
Q3) Contrast some of the features of preferred stock versus common stock.
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) What is the primary shortcoming of the average accounting rate of return from a financial perspective?
A)The lack of use in the business world
B)The lack of a clear-cut decision rule
C)The degree of the calculation difficulty
D)The degree of estimation involved with the initial cost
E)The use of net income rather than cash flows
Q2) No matter how many forms of investment analysis you perform:
A)the actual results from a project may vary significantly from the expected results.
B)the internal rate of return will always produce the most reliable results.
C)a project will never be accepted unless the payback period is met.
D)only the first three years of a project ever affect its final outcome.
E)the initial costs will generally vary considerably from the estimated costs.
Q3) Nadine always makes the final accept/reject decision for proposed projects for ARK International.Her final decision is always based on NPV.Why then does she insist that any proposed project that comes to her desk include an analysis of the project's NPV,IRR,PI,payback,and discounted payback?
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Which one of these statements related to MACRS depreciation is correct?
A)The MACRS percentages in the IRS tables are applied to the current book value of an asset each year.
B)The MACRS system of depreciation was eliminated by the IRS in 2012.
C)An asset will be depreciated faster using MACRS rather than the straight-line method.
D)An asset classified as 3-year MACRS property will be fully depreciated at the end of Year 3.
E)All newly acquired property is considered to be placed in service at the start of the year for MACRS purposes.
Q2) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
Q3) The equivalent annual cost is a method used to primarily compare mutually exclusive machines:
A)with different initial costs but similar lives.
B)depreciated using various methods.
C)that will be replaced with those that will not.
D)that perform different functions.
E)that will be replaced and have unequal lives.
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
If the company conducts a sensitivity analysis using a variable cost of $12,what will the total variable cost estimate be?
A)$59,940
B)$53,500
C)$53,625
D)$54,000
E)$48,060
Q2) Assuming the selling price is greater than the total cost per unit,the contribution margin must increase as:
A)both the sales price and variable cost per unit increase.
B)the sales price per unit declines.
C)the sales price minus the fixed cost per unit increases.
D)the gap between the sales price and the variable cost per unit widens.
E)the fixed cost per unit declines.
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Chapter 10: Risk and Return Lessons From Market History
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Sample Questions
Q1) A stock had returns of 7 percent,12 percent,-10 percent,and 17 percent annually over the past four years.What is the geometric average return for this time period?
A)4.52%
B)5.78%
C)5.99%
D)7.30%
E)8.21%
Q2) Which one of these statements must be correct?
A)Long-term expected rates of return are inversely related to risk premium.
B)The lower the risk premium the higher a security's average rate of return.
C)Risk premium is defined as the nominal rate of return minus the rate of inflation.
D)One security can have both a higher standard deviation and a lower risk premium than another security for the same historical period.
E)A security with a standard deviation of 9.9 percent for a stated historical period will have a higher average rate of return for that period than a security with a standard deviation of 9.6 percent.
Q3) 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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Sample Questions
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) According to the CAPM,the expected return on a risky asset depends on three components.Describe each component,and explain its role in determining expected return.
Q3) A stock has an expected return of 14.21 percent.The return on the market is 11.8 percent and the risk-free rate of return is 3.2 percent.What is the beta of this stock? A).65
B)1.09
C)1.42
D)1.28
E)1.78
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
13
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) The terminal value of a firm is based on which one of these assumptions?
A)The growth rate of the future cash flows will exceed the firm's WACC.
B)All future cash flows will be constant.
C)The cash flows after Time T will diminish on an annual basis.
D)The cash flows will increase in the future at a constant perpetual rate.
E)The firm will be sold at Time T for the stated terminal value.
Q2) A levered firm has a target capital structure of 30 percent debt and 70 percent equity.The aftertax cost of debt is 6.5 percent,the tax rate is 34 percent,and the cost of equity is 12.3 percent.The firm is considering a project that is equally as risky as the overall firm.The project has an initial cash outflow of $1.1 million and annual cash inflows of $480,000 at the end of each year for three years.What is the NPV of the project?
A)$97,777.68
B)$95,856.82
C)$82,018.07
D)$87,001.03
E)$94,322.15
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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Sample Questions
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) ALLGO announced at Time t that it was acquiring DoLittle Industries.There were no other announcements affecting these firms.ALLGO's stock had daily returns of -.2,+.1,-.5,-.1,+.1 for Time <sub>t - 2</sub> to Time <sub>t + 2</sub>,respectively.The daily returns on the market were -.1,+.2,+.1,-.2,and +.2 for Time <sub>t - 2</sub> to Time <sub>t + 2</sub>,respectively.What is the cumulative abnormal return for these five days?
A)-.7
B)-.8
C)-.5
D)-.10
E)-.3
Q3) Why do you think it is difficult for researchers to agree on principles related to behavioral finance?
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) MM Proposition I with tax supports the theory that:
A)the value of an unlevered firm is equal to the value of a levered firm plus the interest tax shield.
B)the value of a firm is inversely related to the amount of leverage used by the firm.
C)there is a positive linear relationship between the debt-to-equity ratio and firm value.
D)a firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
E)a firm's weighted average cost of capital increases as the debt-equity ratio of the firm increases.
Q2) The Border Crossing has no debt and a cost of capital of 11.2 percent.Assume the firm switches to a debt-to-equity ratio of .25 and issues bonds at par with a 6.3 percent coupon.What will be its cost of equity after the switch? Ignore taxes.
A)11.71%
B)12.33%
C)11.54%
D)9.98%
E)12.43%
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Which one of these best describes the relationship between bondholders and stockholders at a time when it appears the firm may be facing increased financial distress?
A)Stockholders have an incentive to underinvest in new projects to the detriment of bondholders.
B)Both parties tend to work together for the common good of the firm.
C)Both bondholders and stockholders will encourage the firm to take on new high risk projects.
D)Bondholders will tend to lower their required rate of interest so the firm can afford additional financing until its financial status improves.
E)Bondholders tend to milk the property at the expense of stockholders.
Q2) The value of a firm is maximized when the:
A)weighted average cost of capital is minimized.
B)levered cost of capital is maximized.
C)tax rate is zero.
D)cost of equity is maximized.
E)debt-equity ratio is minimized.
Q3) How might business risk affect the capital structure of a firm?
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Chapter 16: Dividends and Other Payouts
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Q1) From a tax-paying shareholder's point of view,a stock repurchase:
A)is equivalent to a stock split.
B)is more desirable than a cash dividend.
C)is more highly taxed than a cash dividend.
D)has the same tax effects as a cash dividend.
E)creates a tax liability even if the investor does not participate in the repurchase.
Q2) The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
A)clientele effect.
B)information content effect.
C)efficient markets hypothesis.
D)MM Proposition I.
E)MM Proposition II.
Q3) According to the life cycle theory,when should a firm begin making distributions to shareholders?
Q4) Identify at least four pros of paying dividends.
Q5) Summarize at least four key points that are known about dividends and share repurchases.
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Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) Benny's is reviewing a $384,000 project that is expected to increase the firm's equity by $128,400.What is the project's delta?
A).2289
B).3344
C).6948
D).9903
E).2701
Q2) Carie opted to exercise her May option on April 3<sup>rd</sup> and received $1,750 in exchange for her shares.She must have owned a(n):
A)warrant.
B)American call.
C)American put.
D)European put.
E)European call.
Q3) Explain the rationale behind the statement that equity is a call option on a firm's assets.When would a shareholder allow the call to expire?
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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Sample Questions
Q1) The Down Towner has sales of $642,000 and average accounts payable of $56,400.The cost of goods sold is equivalent to 68 percent of sales.How long does it take Down Towner to pay its suppliers?
A)32.07 days
B)43.45 days
C)40.69 days
D)47.16 days
E)31.85 days
Q2) Which one of the following will increase net working capital? Assume the current ratio is positive.
A)Using cash to pay an accounts payable
B)Using cash to pay a long-term debt
C)Selling inventory at cost
D)Collecting an accounts receivable
E)Using a long-term loan to buy inventory
Q3) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
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Chapter 19: Raising Capital
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Sample Questions
Q1) Why might an eligible firm choose a Rule 415 registration of securities?
Q2) Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?
A)Initial public offering
B)Best efforts underwriting
C)Firm commitment underwriting
D)Rights offer
E)Private placement
Q3) The Corner Market is offering 60,000 shares of stock to the public in a general cash offer.The offer price is $32 a share and the underwriter's spread is 7.5 percent.The administrative costs are estimated at $310,000.How much will Hilltop Market net from this stock offering assuming the issue is completely sold?
A)$1,370,800
B)$1,346,000
C)$1,466,000
D)$1,610,000
E)$1,800,000
Q4) Explain how a Dutch auction operates and why a firm might choose to sell its securities in this manner.
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) You want to invest in a project in Canada.The project has an initial cost of C$290,000 and is expected to produce cash inflows of C$120,000 a year for three years.The project will be worthless after three years.The expected inflation rate in Canada is 3.6 percent while it is 2.7 percent in the U.S.The applicable interest rate in Canada is 11.5 percent.The current spot rate is C$1 = $.97.What is the net present value of this project in U.S.dollars using the foreign currency approach?
A)$736.42
B)$714.33
C)$692.90
D)$708.16
E)$703.08
Q2) Assume a currency is more expensive in the forward market than in the spot market relative to the U.S.dollar.When this occurs the currency is said to be selling at:
A)the spot price.
B)an arbitrage price.
C)a premium relative to the dollar.
D)its true relative value.
E)a discount relative to the dollar.
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Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) Racing Motors has a market value of $210,000.PJ Racing has 20,000 shares of stock outstanding at a price per share of $40.PJ Racing is acquiring Racing Motors in an exchange for 5,625 shares of PJ Racing stock.The merger is expected to create $30,000 of synergy.The post-merger value of the firm will be ____ and the post-merger price per share will be ____.
A)$815,000;$40.75
B)$815,000;$31.80
C)$1,040,000;$40.75
D)$1,040,000;$52.00
E)$1,040,000;$40.59
Q2) The purchase _______ best fits the definition of a vertical acquisition.
A)of a men's clothing store by a women's clothing company
B)of a vacation resort by a steel manufacturer
C)of a coal mine by an electric utility company
D)by a restaurant of its main competitor
E)of an airline by a major retail chain
Q3) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q4) Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.
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