Principle of finance

                                                                         Unit no#1

Challenge no 1

Corporate finance focuses primarily on decisions related to __________.

·a.)

record-keeping and communication

·b.)

production and advertising

·c.)

investment and financing

·d.)

distribution and marketing

The primary purpose of finance is to __________.

·a.)

study the effects of the economy on businesses

·b.)

keep track of a business's cash flow

·c.)

manage assets in a way that maximizes returns

·d.)

pay off debt as quickly as possible

Finance is the study of fund management and ___________.

·a.)

credit

·b.)

asset allocation

·c.)

economics

·d.)

accounting

The price at which an asset would trade in a competitive setting is its __________.

·a.)

stakeholder value

·b.)

fundamental value

·c.)

book value

·d.)

market value

Valuation may be determined through __________.

·a.)

fundamental analysis of financial statements

·b.)

allocation of scarce resources

·c.)

implementation of business strategies

·d.)

oversight of corporate governance

______ is the process of determining the price that market participants would likely pay for something.

·a.)

Valuation

·b.)

Accounting

·c.)

Analysis

·d.)

Financing

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The recent trend of making investment decisions based on a mix of financial, social and environmental considerations is known as __________.

·a.)

angel investing

·b.)

impact investing

·c.)

microfinancing

·d.)

crowdfunding

Crowdfunding is an example of a recent trend in finance known as __________.

·a.)

impact investing

·b.)

credit

·c.)

peer-to-peer lending

·d.)

algorithmic trading

A recent trend in finance that attempts to ease poverty by offering products like business loans to low-income borrowers is __________.

·a.)

microfinancing

·b.)

algorithmic trading

·c.)

impact investing

·d.)

crowdfunding

Business managers who behave in accordance with their personal ethical beliefs, even in the face of difficulty, have strong __________.

·a.)

moral character

·b.)

moral imagination

·c.)

moral reasonableness

·d.)

moral creativity

When businesses work to understand, identify and eliminate unethical behaviors, they are displaying __________.

·a.)

cultural relativism

·b.)

moral universalism

·c.)

ethnocentrism

·d.)

corporate social responsibility

Businesses must be conscious of the __________, or social norms and beliefs in which they operate.

·a.)

relativism

·b.)

culture

·c.)

ethnocentrism

·d.)

moral sensitivity

Vivienne is the CEO of a multinational company that produces mass-market, low-cost toys for children with sensory processing challenges. The company's workforce is grouped into their specific skills and tasks, such as finance, sales, development and production.

 

What form of business structure is used by Vivienne's company?

·a.)

Matrix

·b.)

Functional

·c.)

Pre-bureaucratic

·d.)

Divisional

James is an entrepreneur who decides to open a dog walking business. He wants a simple form of organization that allows him to maintain complete control over the business and receive 100% of the profits. He is not particularly concerned about liability.

 

Which form of business structure would clearly meet James's need?

·a.)

Corporation

·b.)

Partnership

·c.)

Sole proprietorship

·d.)

Limited liability corporation

Jenna is seeking to raise money to develop a new app where individuals can buy and sell used clothing. She is looking for long-term investors in her product, and she wants to protect her personal assets from any liabilities associated with borrowing capital.

 

Which form of business structure would clearly meet Jenna's needs?

·a.)

Limited liability partnership

·b.)

Sole proprietorship

·c.)

Corporation

·d.)

Partnership

What is the primary focus of the recent interest in corporate governance?

·a.)

Mitigating conflict between stakeholders

·b.)

Proper disclosures

·c.)

Social welfare resulting from corporate actions

·d.)

Environmental protection

What was one change enacted by the Sarbanes–Oxley Act of 2002?

·a.)

Congress launched an investigation into executive spending.

·b.)

Corporations were newly required to publish the minutes of all board meetings.

·c.)

Criminal penalties for the manipulation of company financial records were reduced to encourage whistleblowing.

·d.)

An oversight board was created to oversee the audits of public companies in the U.S.

What principle of corporate governance requires that organizations develop a code of conduct for their directors and executives?

·a.)

Role of the board

·b.)

Disclosure and transparency

·c.)

Treatment of shareholders

·d.)

Integrity and ethical behavior

Select the true statement about agency conflicts within a corporation.

·a.)

Agency conflicts can be avoided by allowing managers to make decisions without oversight.

·b.)

Agency conflicts increase when managers' incentives are aligned with the interests of shareholders.

·c.)

Agency conflicts occur when managers pursue actions that are potentially harmful to the interests of principals.

·d.)

Agency conflicts only occur when managers engage in risky behavior.

Select the true statement about the concept of agency cost.

·a.)

Agency costs are increased when agents prioritize the interests of principals.

·b.)

Weak corporate governance is typically associated with low agency costs.

·c.)

Good corporate governance can minimize agency costs by decreasing conflicts of interest.

·d.)

Agency costs are only created when the interests of agents and principals are aligned.

What is a root cause of agency conflicts within a corporation?

·a.)

Decision rights within a corporation are given to managers.

·b.)

Shareholders of a corporation hold voting rights.

·c.)

Shareholders have a right to sell their shares.

·d.)

Bondholders are incentivized to take on risk.

Paul purchases 100 shares of stock in a technology corporation on the New York Stock Exchange seven years after the company initially sold shares to the public.

 

What financial market is Paul participating in?

·a.)

Primary capital market

·b.)

Secondary money market

·c.)

Primary money market

·d.)

Secondary capital market

Despite two years when overall prices fell, share prices in the stock market have risen consistently for eight of the past 10 years.

 

How is this market classified?

·a.)

Primary bull market

·b.)

Secular bull market

·c.)

Secular bear market

·d.)

Primary bear market

Jean has some extra cash sitting under her mattress, so she decides to purchase $2,000 worth of Treasury bills that mature in six months and pay a small amount of interest.

 

What financial market is Jean participating in?

·a.)

Derivative market

·b.)

Capital market

·c.)

Secular market

·d.)

Money market

                                              Challenge no 2

Steve needs to know whether his company made money or lost money in the last quarter of 2019.

 

What type of financial statement should he look at?

·a.)

Cash flow statement

·b.)

Balance sheet

·c.)

Income statement

·d.)

Statement of changes in equity

Jane needs to know more about the movement of money into and out of the company through its operating activities.

 

What type of financial statement should she look at?

·a.)

Income statement

·b.)

Cash flow statement

·c.)

Balance sheet

·d.)

Statement of changes in equity

Shawna wants to know if her company had more assets or liabilities on September 30, 2015.

 

What type of financial statement should she look at?

·a.)

Income statement

·b.)

Statement of changes in equity

·c.)

Cash flow statement

·d.)

Balance sheet

How can you determine a company's total assets from a balance sheet?

·a.)

Calculate total liabilities minus owner's equity

·b.)

Calculate total liabilities plus owner's equity

·c.)

Calculate total assets minus total liabilities

·d.)

Calculate total assets minus total liabilities minus owner's equity

Joan is concerned about her company's liquidity.

 

Of the following parts of the balance sheet, which would provide her with the information she needs?

·a.)

Equity

·b.)

Calculate the total liabilities

·c.)

Non-current assets

·d.)

Current assets

How can you determine a company's net working capital from a balance sheet?

·a.)

Calculate current assets minus current liabilities

·b.)

Calculate total assets minus current liabilities

·c.)

Calculate total assets minus total liabilities

·d.)

Calculate current assets minus total liabilities

Under GAAP, how would the purchase of equipment be accounted for on the statement of cash flows?

·a.)

As an increase in cash flow from investment

·b.)

As a decrease in cash flow from investment

·c.)

As a decrease in cash flow from operations

·d.)

As an increase in cash flow from financing

Under GAAP, how would issuing shares of stock be accounted for on the statement of cash flows?

·a.)

As an increase in cash flow from investment

·b.)

As a decrease in cash flow from investment

·c.)

As an increase in cash flow from financing

·d.)

As a decrease in cash flow from operations

Under GAAP, how would employee salaries be accounted for on the statement of cash flows?

·a.)

As an increase in cash flow from investment

·b.)

As a decrease in cash flow from operations

·c.)

As an increase in cash flow from financing

·d.)

As a decrease in cash flow from financing

Keira is trying to sell her business and a potential buyer wants to know the company's gross profit in the previous quarter.

 

How can Keira find that information on her income statement?

·a.)

It is equal to her net sales.

·b.)

Calculate her net income.

·c.)

Subtract her cost of goods sold from net sales.

·d.)

Subtract her total expenses from her total revenue.

Albion is looking for ways to increase his bottom line by reducing his operating expenses, so he consults his most recent income statement.

 

Which of the following should he focus on?

·a.)

Advertising costs

·b.)

Interest payments

·c.)

Income taxes

·d.)

Foreign exchange losses

Nathan tells a potential investor what his "bottom" line was in the previous quarter.

 

What information does this communicate to his potential buyer?

·a.)

His net operating profit

·b.)

His net income

·c.)

His gross profit

·d.)

His revenue

Which of the following does tax law allow companies to deduct from their gross income?

·a.)

Gift taxes

·b.)

Business expenses

·c.)

Sales revenues

·d.)

Capital gains

Which method of depreciation calculation gives a company a variable tax benefit from year to year that is based on an asset's actual use?

·a.)

Straight line

·b.)

Salvage

·c.)

Activity-based

·d.)

Declining balance

Which organization type calls for owners to determine how much tax each will pay on distributions?

·a.)

Partnership

·b.)

LLC

·c.)

S Corp

·d.)

Sole proprietorship

                                               Challenge no #3

Select the correct order for the parts of a balance sheet.

·a.)

1.Equity

2.Assets

3.Liability

·b.)

1.Assets

2.Equity

3.Liabilities

·c.)

1.Liabilities

2.Assets

3.Equity

·d.)

1.Assets

2.Liabilities

3.Equity

Select the correct order for the parts of an income statement.

·a.)

1.Expenses

2.Revenue

3.Net income

·b.)

1.Net income

2.Revenue

3.Expenses

·c.)

1.Revenue

2.Net income

3.Expenses

·d.)

1.Revenue

2.Expenses

3.Net income

Select the option that reflects how assets are typically organized on a balance sheet.

·a.)

1.Current assets

2.Other assets

3.Long-term assets

·b.)

1.Current assets

2.Long-term assets

3.Other assets

·c.)

1.Long-term assets

2.Other assets

3.Current assets

·d.)

1.Long-term assets

2.Current assets

3.Other assets

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Ratios that provide valuable information to shareholders are __________.

·a.)

market ratios

·b.)

asset management ratios

·c.)

liquidity ratios

·d.)

profitability ratios

Ratios that measure how well a company controls expenses are __________.

·a.)

asset management ratios

·b.)

profitability ratios

·c.)

liquidity ratios

·d.)

leverage ratios

Ratios that measure the effective use of inventory would be found among __________.

·a.)

asset management ratios

·b.)

debt ratios

·c.)

leverage ratios

·d.)

profitability ratios

If net profit is $230,000 and equity is $1.2 million, then ROE is __________.

·a.)

Cannot calculate without total expenses data

·b.)

19.17%

·c.)

80.83%

·d.)

Cannot calculate without total assets data

If net profit is $230,000 and operating income is $765,000, then the net profit margin is __________.

·a.)

icalculable without EBIT data

·b.)

incalculable without sales data

·c.)

70%

·d.)

30%

If total revenue is $400,000 and operating income is $250,000, then the operating margin is __________.

·a.)

62.50%

·b.)

incalculable without operating expenses data

·c.)

37.50%

·d.)

incalculable without EBIT data

Which of the following would explain a company’s day sales outstanding ratio falling from 44.5 to 32.5?

·a.)

The company's accounts receivable has decreased while total sales has remained constant.

·b.)

The company's accounts receivable has remained constant while total sales has decreased.

·c.)

The company's accounts receivable has increased while total sales has remained constant.

·d.)

The company's accounts receivable has increased while total sales has decreased.

Which of the following would explain a company’s inventory turnover ratio falling from 4 to 2.5?

·a.)

The company's cost of goods sold has increased while the average inventory has decreased.

·b.)

The company's cost of goods sold has remained constant while the average inventory has decreased.

·c.)

The company's cost of goods sold has increased while the average inventory has remained constant.

·d.)

The company's cost of goods sold has decreased while the average inventory has remained constant.

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Which of the following would explain a company’s day sales outstanding ratio rising from 27.3 to 38?

·a.)

The company's accounts receivable has decreased while total sales has increased.

·b.)

The company's accounts receivable has increased while total sales has remained constant.

·c.)

The company's accounts receivable has remained constant while total sales has increased.

·d.)

The company's accounts receivable has decreased while total sales has remained constant.

What does it mean if a company has a quick ratio of 1.75?

·a.)

The company likely does not have enough resources to pay its debts over the next 12 months unless inventory is excluded.

·b.)

The company likely has enough resources, even when excluding inventory, to pay its debts over the next 12 months.

·c.)

The company likely has enough resources to pay its debts over the next 12 months, although this may not be true if inventory is excluded.

·d.)

The company likely does not have enough resources to pay its debts over the next 12 months.

Consider the current ratio of the following companies. 

·Company A: 1.15

·Company B: 0.8

·Company C: 1.25

·Company D: 1.65

Which company has adequate liquidity?

· a.)

Company D

·b.)

Company B

·c.)

Company A

·d.)

Company C

What does it mean if a company has a current ratio of 3.25?

·a.)

The company's current liabilities exceed its current assets.

·b.)

The company's ability to pay off its short term debt exceeds what is generally considered adequate.

·c.)

The company's ability to pay off its short term debt falls below what industry generally considers adequate.

·d.)

The company has an excess of inventory that cannot be easily converted into cash.

If Company A has a TIE of 0.8 and Company B has a TIE of 2, then Company A has __________ than Company B.

·a.)

a greater need to borrow funds to meet its debt obligations

·b.)

a higher EBIT

·c.)

a lower level of financial risk

·d.)

better interest coverage

If Company A has a higher debt ratio than Company B, then Company A is likely to have __________ than Company B.

·a.)

more flexibility when it comes to borrowing

·b.)

a lower level of financial risk

·c.)

more total liabilities

·d.)

less ability to pay off its long-term debt

If Company A has a higher TIE ratio than Company B, then Company A has __________ than Company B.

·a.)

more sales

·b.)

better interest coverage

·c.)

less sales

·d.)

a lower EBIT

Consider the P/E ratios of the following companies:

·Company A: 12.25

·Company B: 15.43

·Company C: 19.30

·Company D: 8.75

Which company has the greatest relative value among investors?

·a.)

Company C

·b.)

Company D

·c.)

Company A

·d.)

Company B

Consider the price to book ratios of the following companies:

·Company A: 6.3

·Company B: 9.9

·Company C: 2.5

·Company D: 4.8

Of the four companies, Company C has the __________.

·a.)

lowest dollar price per unit of current net income

·b.)

highest net income

·c.)

lowest dollar price per carrying value of assets

·d.)

highest dollar price

Consider the P/E ratios of the following companies:

·Company A: 8.5

·Company B: 12.2

·Company C: 10.4

·Company D: 9.7

Which company has the lowest relative value among investors?

·a.)

Company C

·b.)

Company D

·c.)

Company B

·d.)

Company A

Profit margin is calculated by ___________.

·a.)

 

·b.)

 

·c.)

 

·d.)

 

Financial leverage is calculated by __________.

·a.)

 

·b.)

Asset turnover is calculated by __________.

·a.)

 

·b.)

 

·c.)

 

·d.)

 

 

·c.)

 

·d.)

 

Comparing a company's performance over time can be done through __________.

·a.)

historical analysis

·b.)

benchmarking

·c.)

forecasting

·d.)

trend analysis

Trend analysis is most often used for the purpose of ___________.

·a.)

analyzing external economic indicators

·b.)

comparing two companies to one another

·c.)

analyzing company metrics over time

·d.)

analyzing company sales trends

Peter is a financial analyst whose boss assigned him the task of examining a company in the travel industry. Peter compares several of the company's financial ratios to those of the leading company in the industry.

 

What type of analysis is he performing?

·a.)

Projecting

·b.)

Industry analysis

·c.)

Fundamental analysis

·d.)

Benchmarking

                                                    Challenge no 4

The process of applying sales goals to production in order to maximize efficiency is __________.

·a.)

financial planning

·b.)

efficiency planning

·c.)

strategic planning

·d.)

capacity planning

The estimate of future outcomes stemming from a strategic plan is a(n) __________.

·a.)

economic forecast

·b.)

AFN forecast

·c.)

financial forecast

·d.)

sales forecast

An organization's process for setting its overall direction is _________.

·a.)

strategic planning

·b.)

modeling

·c.)

capacity planning

·d.)

financial forecasting

Robyn wants to prepare a pro forma income statement for her business.

 

What must she predict before forecasting her expenses?

·a.)

Net income

·b.)

Cost of goods sold

·c.)

Taxes

·d.)

Sales

If a sales decrease is forecasted, how will that affect expenses on the pro forma income statement if market conditions are expected to remain stable?

·a.)

Expenses will decrease.

·b.)

It depends on the type of product being sold.

·c.)

Expenses will increase.

·d.)

There is no effect on expenses.

How are expenses forecasted on a pro forma income statement?

·a.)

As a percentage of gross margin

·b.)

By duplicating actual expenses from the preceding period

·c.)

As a percentage of forecasted sales, based on historical data

·d.)

By adjusting expenses from the previous period for inflation

The pro forma balance sheet reflects changes required by the __________.

·a.)

most recent income statement

·b.)

pro forma cash flow statement

·c.)

pro forma income statement

·d.)

most recent profit and loss statement

The pro forma balance sheet is prepared to ensure that the company's projected performance is in line with its __________.

·a.)

industry norms

·b.)

historical performance

·c.)

economic forecast

·d.)

strategic plan

A pro forma balance sheet is used as __________.

·a.)

a projection of the effects of a proposed transaction on assets, liability and equity

·b.)

an accounting of the actual effects of a significant transaction on revenue and expenses

·c.)

an accounting of the actual effects of a significant transaction on assets, liability and equity

·d.)

a projection of the effects of a proposed transaction on revenue and expenses

Select a reason why cash flow forecasting is important to a company's success.

·a.)

It helps a company to grow its sales.

·b.)

It is central to a company's liquidity.

·c.)

It contracts a company's cash disbursement cycle.

·d.)

It increases a company's processing float time.

Select a reason why cash flow forecasting is important to a company's success.

·a.)

It enables companies to generate more cash by increasing accounts receivable.

·b.)

It enables a company to determine its financial health by projecting its sales revenues.

·c.)

It enables companies to use cash efficiently and avoid sitting on unnecessary cash reserves.

·d.)

It enables a company to predict its bottom line in a future time period.

Select a reason why cash flow forecasting is important to a company's success.

·a.)

It ensures that a company will remain profitable.

·b.)

It increases the efficiency of a company's inventory management.

·c.)

It helps a company avoid running out of cash to make payments with.

·d.)

It improves a company's ability to collect cash receipts.

What is a question that should be asked about accounts payable when forecasting?

·a.)

How quickly can we replenish goods?

·b.)

What are the costs associated with storing goods?

·c.)

How much cash is needed on hand to meet current liabilities?

·d.)

How much bad debt should be anticipated?

What is a question that should be asked about accounts receivable when forecasting?

·a.)

Do we risk insolvency?

·b.)

How much product should we keep on hand to meet demand?

·c.)

What will it cost to warehouse the product?

·d.)

How many credit accounts will likely default?

What is a question that should be asked about inventory when forecasting?

·a.)

What price will the product command in the future?

·b.)

What is the effect on liquidity?

·c.)

When will sales made on credit be paid?

·d.)

Will there be sufficient cash on hand?

 

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