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Principle of Finance Final Exam Sophia Course Answer

Principle of Finance Final Exam Sophia Course Answer

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When finalizing a pro forma income statement, what should be considered in addition to the sales forecast?

Forecasted market changes that may affect expenses

Forecasted changes to owner's equity

Forecasted target volume

Forecasted revenues

CONCEPT

Forecasting the Income Statement

Preparing a cash flow forecast helps a company to avoid __________.

higher financing costs

net losses

opportunity costs

liquidity

CONCEPT

Building a Cash Budget

If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?

$19 million

$25 million

$16 million

$31 million

CONCEPT

The Balance Sheet

The purpose of a pro forma balance sheet is to __________.

prepare for a financial audit

compare previous accounting periods

analyze the effects of a sales forecast

analyze historical data

CONCEPT

Forecasting the Balance Sheet

If Company A has a TIE ratio of 3 and Company B has a TIE ratio of 1.2, then Company A is more likely to __________ than Company B.

be able to honor its debt payments

default on its short-term debt

be able to repay its long-term debt

need to use cash on hand to meet its interest obligations

CONCEPT

Debt Management Ratios

What is the recent trend of algorithmic trading criticized for?

Increasing market volatility

Being too transparent

Improving market liquidity

Over-extending credit

CONCEPT

Trends and Issues in Finance

Why is it good for businesses when personal values and company values align?

Because companies are more likely to follow the law.

Because employees are more likely to uphold company values.

Because employees are more likely to have moral sensitivity.

Because managers can avoid having to deal with ethical questions.

CONCEPT

Ethics: An Overview

Select the true statement about the concept of agency cost.

An agency cost is one that is incurred when an agent's actions deviate from the principal's interests.

An agency cost is a cost to an organization that is inversely related to the organization's assumption of risk.

An agency cost is a variable cost to an organization that has yet to be approved by the principal.

An agency cost is one that is incurred when bondholders raise the interest rate on a bond.

CONCEPT

Agency and Conflicts of Interest

If equity is $2 million and total revenue is $1.3 million, then ROE is __________.

incalculable without EBIT data

35%

65%

incalculable without net profit data

CONCEPT

Profitability Ratios

Which of the following would explain a company’s inventory turnover ratio rising from 2.5 to 3.5?

The company's total sales has decreased while the average inventory has remained constant.

The company's total sales has decreased while the average inventory has increased.

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

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

CONCEPT

Asset Management Ratios

Finance is most concerned with __________.

determining how much assets and investments will be worth over time

determining how much assets and investments were worth in the past

determing the ratio of assets to investments

determining the current value of assets and investments

CONCEPT

Introducing Finance

In which scenario would benchmarking be least useful?

Comparing financial ratios of a company in a primary industry and an extractive industry

Comparing financial ratios of a company in a tertiary industry and a service industry

Comparing financial ratios of a company in a secondary industry and a manufacturing industry

Comparing financial ratios of a company in an extractive industry and a tertiary industry

CONCEPT

Using Financial Ratios for Analysis

Under GAAP, how would the sale of company-owned land be accounted for on the statement of cash flows?

As a decrease in cash flow from financing

As a decrease in cash flow from operations

As an increase in cash flow from operations

As an increase in cash flow from investment

CONCEPT

The Statement of Cash Flows

Which method of depreciation calculation gives a company an equal tax benefit from one year to the next?

Declining balance

Activity-based

Salvage

Straight line

CONCEPT

Tax Considerations

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

Are we taking on too much debt?

What percentage of sales will likely be made on credit?

What is the lead time needed to replenish goods?

What do we anticipate owing to our suppliers?

CONCEPT

Analyzing Forecasts

Finn is interested in taking over a small business, but he wants to pay a fair price for it, so he consults their income statements.

How can he determine the company's overall profitability in each quarter of the previous year?

Calculate total revenue minus operating expenses

Calculate total revenue minus taxes paid

Calculate operating revenue minus operating expenses

Calculate total revenue minus total expenses

CONCEPT

The Income Statement

Using the DuPont equation, how can a company determine if it has an acceptable ROE?

If it is at least 15%.

If it is over 50%.

If it is over 30%.

If it is between 2-3%.

CONCEPT

The DuPont Equation

In the United States, the role of corporate governance is to maximize __________.

market value and stakeholder value

shareholder value and stakeholder value

fundamental value and shareholder value

market value and shareholder value

CONCEPT

Goals of Financial Management

Strategic planning answers the question "__________"

How many people do we need?

How much money do we have?

Where are we going?

Who are we competing with?

CONCEPT

Financial Forecasting

Consider the price to book ratios of the following companies:

·Company A: 5.45

·Company B: 14.30

·Company C: 10.08

·Company D: 19.62

Which company do investors believe will create the most value from its assets?

Company A

Company D

Company B

Company C

CONCEPT

Market Value Ratios

Consider the following information:

Total current assets $78,632

Deferred income taxes $3,210

Inventories $9,823

Prepaid expenses $1,050

Other assets $3,890

Total current liabilities $32,043

What is the quick ratio?

2.45

2.32

2.15

2.24

CONCEPT

Liquidity Ratios

What expenses typically come first in the "Expenses" section of an income statement?

Non-operating expenses

Tax expenses

Irregular expenses

Selling, general and administrative expenses

CONCEPT

Standardizing Financial Statements

After a significant economic recession, prices and investing activity in the stock market began trending consistently upward six years ago. In the last three months, this trend has reversed and prices have fallen steadily.

How are the past three months of the stock market classified?

Primary bear market

Secular bull market

Primary bull market

Secular bear market

CONCEPT

Financial Markets

Haley is expanding her tax preparation business and wants to reorganize it. She wants to better protect her personal assets from any liabilities associated with the business, and she wants to pay a lower tax rate on her business income. She also believes her business will benefit from oversight from a board of directors.

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

Sole proprietorship

Corporation

Partnership

Limited liability partnership

CONCEPT

Types of Business Organizations

Lucas is worried about his company's short-term viability.

What type of financial statement should he look at?

Cash flow statement

Balance sheet

Income statement

Statement of changes in equity

CONCEPT

Introducing Financial Statements

Ratios that measure the value of a company's stock are __________.

market ratios

leverage ratios

liquidity ratios

asset management ratios

CONCEPT

Overview of Ratio Analysis

What principle of corporate governance requires public clarification of the roles and responsibilities of board and management in order to provide stakeholders with a level of accountability?

Shareholder rights

Interests of other stakeholders

Integrity and ethical behavior

Disclosure and transparency

CONCEPT

What principle of corporate governance requires public clarification of the roles and responsibilities of board and management in order to provide stakeholders with a level of accountability?

Disclosure and transparency

Interests of other stakeholders

Integrity and ethical behavior

Shareholder rights

CONCEPT

Corporate Governance

What is finance?

The process of communicating financial information about a business

The social science that analyzes the production, distribution and consumption of goods and services

The study of how to allocate assets to maximize returns

The study of a business's past financial decisions

CONCEPT

Introducing Finance

Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?

As a decrease in cash flow from investment

As an increase in cash flow from financing

As an increase in cash flow from operations

As a decrease in cash flow from financing

CONCEPT

The Statement of Cash Flows

Consider the following information:

Total current assets $62,301

Deferred income taxes $1,345

Inventories $5,664

Prepaid expenses $2,034

Other assets $2,906

Total current liabilities $29,748

What is the quick ratio?

1.82

2.02

1.90

2.09

CONCEPT

Liquidity Ratios

If a company has a higher than usual cost of goods sold in a year, what potential effect does that have on its taxes?

It potentially reduces them as a tax deduction.

It potentially reduces them as a tax credit.

It potentially increases them through declining balance amortization.

Cost of goods sold does not affect corporate taxes.

CONCEPT

Tax Considerations

In the United States, the role of corporate governance is to maximize __________.

market value and stakeholder value

market value and shareholder value

shareholder value and stakeholder value

fundamental value and shareholder value

CONCEPT

Goals of Financial Management

Consider the P/E ratios of the following companies:

·Company A: 7.4

·Company B: 11.3

·Company C: 14.8

·Company D: 9.1

Among these four companies, Company C has the __________.

lowest relative value

highest relative value

highest dollar price

lowest net income

CONCEPT

Market Value Ratios

How are assets typically organized on a balance sheet?

In order of value, with least valuable assets first.

In order of liquidity, with least liquid assets first.

In order of value, with most valuable assets first.

In order of liquidity, with more liquid assets first.

CONCEPT

Standardizing Financial Statements

By appropriately preparing a forecast budget, a company can avoid __________.

inventory shortages

a net loss

insolvency

regulation

CONCEPT

Building a Cash Budget

Capacity planning answers the question "__________"

How can we be most efficient?

What will our revenue be?

How will we decide which direction to go?

How will we finance it?

CONCEPT

Financial Forecasting

Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?

The company's accounts receivable has decreased while the average inventory has increased.

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

The company's accounts receivable has decreased while the average inventory has remained constant.

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

CONCEPT

Asset Management Ratios

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

It depends on the type of product being sold.

Expenses will increase.

Expenses will decrease.

There will be no effect on expenses.

CONCEPT

Forecasting the Income Statement

A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.

What type of financial statement should he look at?

Balance sheet

Cash flow statement

Statement of changes in equity

Income statement

CONCEPT

Introducing Financial Statements

Using the DuPont equation, how can a company determine if it has an acceptable ROE?

If it is between 2-3%.

If it is over 50%.

If it is at least 15%.

If it is over 30%.

CONCEPT

The DuPont Equation

The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.

inventory

sales forecast

AFN

equity

CONCEPT

Forecasting the Balance Sheet

What is the recent trend of algorithmic trading criticized for?

Improving market liquidity

Over-extending credit

Increasing market volatility

Being too transparent

CONCEPT

Trends and Issues in Finance

Ratios that measure a company's ability to pay off short-term debt are _________.

market ratios

asset management ratios

liquidity ratios

leverage ratios

CONCEPT

Overview of Ratio Analysis

If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?

$25 million

$16 million

$19 million

$31 million

CONCEPT

The Balance Sheet

Why are ethical issues complicated for businesses that operate in the global economy?

Because they don't have as much moral character as small, local businesses.

Because they tend to have more employees.

Because different cultures have different norms and values.

Because their employees won't know what the laws are in other countries.

CONCEPT

Ethics: An Overview

Georgia is interested in selling her company. Before seeking a buyer, she wants her income statements to show a trend of increasing gross profits.

How can she achieve her goal?

Reduce cost of goods sold

Reduce operating expense

Reduce taxes paid

Reduce net sales

CONCEPT

The Income Statement

Which of the following is an example of an agency conflict?

Shareholder voting rights

Managerial self-dealing

Board oversight

Manager's salary

CONCEPT

Agency and Conflicts of Interest

Tom and Wendy are launching a life coaching business. They plan to have an equal say in any managerial business decisions and they plan to share any profits or losses. They are concerned about their exposure to liability, so they have purchased some professional insurance policies. However, they are pleased with how simple it has been to organize their business.

Which form of business structure have Tom and Wendy likely adopted?

Corporation

Sole proprietorship

Partnership

S corporation

CONCEPT

Types of Business Organizations

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

a higher level of financial risk

more total assets

a greater ability to borrow

less financial flexibility

CONCEPT

Debt Management Ratios

How are the past three months of the stock market classified?

Secular bear market

Primary bear market

Secular bull market

Primary bull market

CONCEPT

Financial Markets

In which scenario would benchmarking be least useful?

Comparing financial ratios of a company in a primary industry and an extractive industry

Comparing financial ratios of a company in a tertiary industry and a service industry

Comparing financial ratios of a company in an extractive industry and a tertiary industry

Comparing financial ratios of a company in a secondary industry and a manufacturing industry

CONCEPT

Using Financial Ratios for Analysis

If equity is $2 million and total revenue is $1.3 million, then ROE is __________.

incalculable without net profit data

incalculable without EBIT data

65%

35%

CONCEPT

Profitability Ratios

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

How quickly can we collect cash receipts?

What are the current storage costs?

What is the anticipated ratio of credit to cash sales?

Is the company's liquidity sufficient?

If a company has a higher than usual cost of goods sold in a year, what potential effect does that have on its taxes?

It potentially reduces them as a tax deduction.

It potentially reduces them as a tax credit.

It potentially increases them through declining balance amortization.

Cost of goods sold does not affect corporate taxes.

CONCEPT

Tax Considerations

Under GAAP, how would the sale of company-owned land be accounted for on the statement of cash flows?

As a decrease in cash flow from financing

As an increase in cash flow from investment

As an increase in cash flow from operations

As a decrease in cash flow from operations

CONCEPT

The Statement of Cash Flows

Xander is looking for ways to reduce his non-operating expenses to improve his company's overall financial performance, so he consults his most recent income statement.

Which of the following should he focus on?

Amortization

Depreciation

Wages

Income taxes

CONCEPT

The Income Statement

Internet platforms have allowed for the greatest increase of what recent trend in finance?

Algorithmic trading

Microfinancing

Impact investing

Peer-to-peer lending

CONCEPT

Trends and Issues in Finance

When finalizing a pro forma income statement, what should be considered in addition to the sales forecast?

Forecasted target volume

Forecasted revenues

Forecasted market changes that may affect expenses

Forecasted changes to owner's equity

CONCEPT

Forecasting the Income Statement

If operating income is $155,000 and total revenue is $577,000, then the operating margin is __________.

72.20%

26.80%

incalculable without equity data

incalculable without net income data

CONCEPT

Profitability Ratios

Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?

The company's accounts receivable has decreased while the average inventory has increased.

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

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

The company's accounts receivable has decreased while the average inventory has remained constant.

CONCEPT

Asset Management Ratios

Ratios that measure a company's ability to pay off short-term debt are _________.

market ratios

liquidity ratios

leverage ratios

asset management ratios

CONCEPT

Overview of Ratio Analysis

Why is it good for businesses when personal values and company values align?

Because employees are more likely to have moral sensitivity.

Because companies are more likely to follow the law.

Because managers can avoid having to deal with ethical questions.

Because employees are more likely to uphold company values.

CONCEPT

Ethics: An Overview

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

less long-term debt

less likelihood of using cash on hand to meet its interest obligations

poorer interest coverage

a higher EBIT

CONCEPT

Debt Management Ratios

Consider the following information:

Total current assets $42,123

Deferred income taxes $2,638

Inventories $4,873

Prepaid expenses $1,554

Other assets $6,263

Total current liabilities $38,902

What is the current ratio?

1.21

1.15

0.97

1.08

CONCEPT

Liquidity Ratios

The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.

sales forecast

AFN

inventory

equity

CONCEPT

Forecasting the Balance Sheet

Using the DuPont equation, how can a company determine if it has an acceptable ROE?

If it is over 50%.

If it is over 30%.

If it is at least 15%.

If it is between 2-3%.

CONCEPT

The DuPont Equation

Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years.

How is this market classified?

Secular bull market

Secular bear market

Primary bull market

Primary bear market

CONCEPT

Financial Markets

Strategic planning answers the question "__________"

Where are we going?

How much money do we have?

How many people do we need?

Who are we competing with?

CONCEPT

Financial Forecasting

Betina is trying to convince a buyer to purchase her company. The buyer wants to know what the company's overall financial condition was on December 31, 2018.

What type of financial statement should Betina provide?

Statement of changes in equity

Income statement

Balance sheet

Cash flow statement

CONCEPT

Introducing Financial Statements

Finance is most concerned with __________.

determining how much assets and investments were worth in the past

determining how much assets and investments will be worth over time

determining the current value of assets and investments

determing the ratio of assets to investments

CONCEPT

Introducing Finance

How are assets typically organized on a balance sheet?

In order of liquidity, with more liquid assets first.

In order of value, with most valuable assets first.

In order of value, with least valuable assets first.

In order of liquidity, with least liquid assets first.

CONCEPT

Standardizing Financial Statements

Roger is a graphic designer who is in the early phases of launching his own business. So far he has only a handful of employees, and he prefers to make all of the operational decisions for the business himself.

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

Matrix

Pre-bureaucratic

Functional

Divisional

CONCEPT

Types of Business Organizations

If a balance sheet shows $4 million in current assets, $7 million in long-term assets, $2 million in current liabilities and $6 million in long-term liabilities, what is the company's net working capital?

$3 million

$4 million

$1 million

$2 million

CONCEPT

The Balance Sheet

For which company can trend analysis be most useful?

A retail company that recently changed its accounting practices and its business model

A mining company that recently changed its business model, but not its accounting practices

A banking company that recently changed its accounting practices, but not its business model

A software company whose business model and accounting practices have remained stable over time

CONCEPT

Using Financial Ratios for Analysis

In the United States, the role of corporate governance is to maximize __________.

market value and stakeholder value

market value and shareholder value

fundamental value and shareholder value

shareholder value and stakeholder value

CONCEPT

Goals of Financial Management

Consider the P/E ratios of the following companies:

·Company A: 5.34

·Company B: 3.33

·Company C: 7.90

·Company D: 6.75

Which company has the lowest relative value among investors?

Company A

Company C

Company B

Company D

CONCEPT

Market Value Ratios

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

How quickly can we collect cash receipts?

What is the anticipated ratio of credit to cash sales?

Is the company's liquidity sufficient?

What are the current storage costs?

CONCEPT

Analyzing Forecasts

Which statement best characterizes the impact of regulatory changes on corporate governance since the 1990s?

Oversight by boards of directors and independent auditors has decreased, allowing for greater corporate flexibility.

New regulations require corporate managers to prioritize the interests of external stakeholders over those of shareholders.

Corporate transparency and accountability have increased through revised reporting and oversight requirements and stiffer penalties for fraud.

Corporate governance has become untenable due to requirements that all conflicts of interest be catalogued.

CONCEPT

Corporate Governance

By appropriately preparing a forecast budget, a company can avoid __________.

insolvency

inventory shortages

regulation

a net loss

CONCEPT

Building a Cash Budget

Under what circumstance would agency conflict be most likely to increase?

When oversight by the board is adequate.

When owners are very close to the business.

When the incentives of a manager align with those of owners.

When owners are separated from the business.

CONCEPT

Agency and Conflicts of Interest

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

What are the current storage costs?

What is the anticipated ratio of credit to cash sales?

How quickly can we collect cash receipts?

Is the company's liquidity sufficient?

CONCEPT

Analyzing Forecasts

Which of the following is true of ethics and its application to the business environment?

The ethical norms and values of a business can have a powerful influence on its employees.

Personal values have no place in business, where decisions should be made according to organizational values and norms.

Employers prefer to hire individuals whose ethics conflict with that of the business organization.

Conflicts rarely occur between an individual's ethics and a business organization's ethics.

CONCEPT

Ethics: An Overview

For which company can trend analysis be most useful?

A retail company that recently changed its accounting practices and its business model

A mining company that recently changed its business model, but not its accounting practices

A banking company that recently changed its accounting practices, but not its business model

A software company whose business model and accounting practices have remained stable over time

CONCEPT

Using Financial Ratios for Analysis

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

less likelihood of using cash on hand to meet its interest obligations

poorer interest coverage

less long-term debt

a higher EBIT

CONCEPT

Debt Management Ratios

Which of the following is an example of an agency conflict?

Manager's salary

Board oversight

Managerial self-dealing

Shareholder voting rights

CONCEPT

Agency and Conflicts of Interest

What was one outcome of the Sarbanes-Oxley Act of 2002?

CEOs are prohibited from earning bonuses tied to company stock performance.

Top management of U.S. companies must now individually and personally certify the accuracy of financial information.

Public corporations are no longer required to use independent auditors to review their accounting practices.

Expenses related to corporate compliance are now tax-deductible.

CONCEPT

Corporate Governance

Financial forecasting answers the question "__________"

Do we have enough production capacity?

When should we begin?

What will our sales be?

What are our goals?

CONCEPT

Financial Forecasting

Preparing a cash flow forecast helps a company to examine and manage its __________.

bottom line

profitability

float times

accounting practices

CONCEPT

Building a Cash Budget

Xander is looking for ways to reduce his non-operating expenses to improve his company's overall financial performance, so he consults his most recent income statement.

Which of the following should he focus on?

Amortization

Income taxes

Wages

Depreciation

CONCEPT

The Income Statement

Which market is intended to benefit from the recent trend of microfinance?

Impoverished individuals

Venture capitalists

Corporations

Foreign governments

CONCEPT

Trends and Issues in Finance

Which organization most fully protects owners from personal liabilities and is taxed separately?

S Corp

LLC

Partnership

C Corp

CONCEPT

Tax Considerations

Consider the P/E ratios of the following companies:

·Company A: 5.34

·Company B: 3.33

·Company C: 7.90

·Company D: 6.75

Which company has the lowest relative value among investors?

Company C

Company A

Company B

Company D

CONCEPT

Market Value Ratios

One reason that ROE calculations are broken down into three components in the DuPont equation is that __________.

it shows management where ROE improvements can be made

the numbers are more difficult to falsify

it highlights exceptional financial planning

it hides problem areas from analysts

CONCEPT

The DuPont Equation

If net income is $90 million and total assets are $480 million, then the ROA is __________.

incalculable without gross profit data

incalculable without EBIT data

18.75%

25.00%

CONCEPT

Profitability Ratios

A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.

What type of financial statement should he look at?

Income statement

Balance sheet

Cash flow statement

Statement of changes in equity

CONCEPT

Introducing Financial Statements

Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?

As a decrease in cash flow from financing

As a decrease in cash flow from investment

As an increase in cash flow from operations

As an increase in cash flow from financing

CONCEPT

The Statement of Cash Flows

Which form of business structure have Tom and Wendy likely adopted?

S corporation

Sole proprietorship

Partnership

Corporation

CONCEPT

Types of Business Organizations

Ratios that measure a company's ability to manage its long-term debt are _________.

leverage ratios

efficiency ratios

profitability ratios

liquidity ratios

CONCEPT

Overview of Ratio Analysis

The pro forma balance sheet reflects the impact of a company's strategic plan on its __________.

revenue and expenses

share price

assets and liabilities

revenue and expenses

CONCEPT

Forecasting the Balance Sheet

Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?

The company's accounts receivable has decreased while the average inventory has increased.

The company's accounts receivable has decreased while the average inventory has remained constant.

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

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

CONCEPT

Asset Management Ratios

Over the last six years, prices and investing activity in the bond market rose for two years and then fell consistently for the next four years.

How is this market classified?

Secular bear market

Secular bull market

Primary bull market

Primary bear market

CONCEPT

Financial Markets

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

Expenses will increase.

Expenses will decrease.

There will be no effect on expenses.

It depends on the type of product being sold.

CONCEPT

Forecasting the Income Statement

$2 million

$3 million

$1 million

$4 million

CONCEPT

The Balance Sheet

The primary factor behind all of finance is __________.

debt

equity

money

time

CONCEPT

Introducing Finance

Consider the following information:

Total current assets $42,123

Deferred income taxes $2,638

Inventories $4,873

Prepaid expenses $1,554

Other assets $6,263

Total current liabilities $38,902

What is the current ratio?

1.08

1.21

0.97

1.15

CONCEPT

Liquidity Ratios

Select the option that reflects how revenue is typically organized on an income statement.

§Sales

§Cost of goods sold

§Other revenue

§Sales

§Other revenue

§Cost of goods sold

§Sales

§Other revenue

§Cost of goods sold

§Other revenue

§Sales

CONCEPT

Standardizing Financial Statements

Valuation of a business relies on __________.

keeping accurate financial statements

maximizing shareholder value

strengthening corporate governance

maximizing market value

CONCEPT

The pro forma balance sheet reflects the impact of a company's strategic plan on its __________.

revenue and expenses

share price

revenue and expenses

assets and liabilities

CONCEPT

Forecasting the Balance Sheet

Which method of depreciation calculation gives a company an equal tax benefit from one year to the next?

Activity-based

Declining balance

Straight line

Salvage

CONCEPT

Tax Considerations

One reason that ROE calculations are broken down into three components in the DuPont equation is that __________.

it hides problem areas from analysts

it shows management where ROE improvements can be made

the numbers are more difficult to falsify

it highlights exceptional financial planning

CONCEPT

The DuPont Equation

Why are ethical issues complicated for businesses that operate in the global economy?

Because they tend to have more employees.

Because they don't have as much moral character as small, local businesses.

Because their employees won't know what the laws are in other countries.

Because different cultures have different norms and values.

CONCEPT

Ethics: An Overview

If equity is $2 million and total revenue is $1.3 million, then ROE is __________.

incalculable without net profit data

incalculable without EBIT data

65%

35%

CONCEPT

Profitability Ratios

What expenses typically come first in the "Expenses" section of an income statement?

Irregular expenses

Non-operating expenses

Tax expenses

Selling, general and administrative expenses

CONCEPT

Standardizing Financial Statements

Under GAAP, how would dividends paid to company stockholders be accounted for on the statement of cash flows?

As a decrease in cash flow from financing

As a decrease in cash flow from investment

As an increase in cash flow from financing

As an increase in cash flow from operations

CONCEPT

The Statement of Cash Flows

The primary factor behind all of finance is __________.

money

time

equity

debt

CONCEPT

Introducing Finance

If Company A has a TIE ratio of 3 and Company B has a TIE ratio of 1.2, then Company A is more likely to __________ than Company B.

need to use cash on hand to meet its interest obligations

default on its short-term debt

be able to repay its long-term debt

be able to honor its debt payments

CONCEPT

Debt Management Ratios

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

Expenses will increase.

There will be no effect on expenses.

Expenses will decrease.

It depends on the type of product being sold.

CONCEPT

Forecasting the Income Statement

Which of the following would explain a company’s inventory turnover ratio rising from 2.5 to 3.5?

The company's total sales has decreased while the average inventory has increased.

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

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

The company's total sales has decreased while the average inventory has remained constant.

CONCEPT

Asset Management Ratios

Which market is intended to benefit from the recent trend of microfinance?

Venture capitalists

Foreign governments

Impoverished individuals

Corporations

CONCEPT

Trends and Issues in Finance

Which form of business structure have Tom and Wendy likely adopted?

S corporation

Partnership

Corporation

Sole proprietorship

CONCEPT

Types of Business Organizations

The process of predicting what the market would pay for a company's investments and bonds is __________.

appraisal

assessment

financial management

valuation

CONCEPT

Goals of Financial Management

A potential investor in Cristian's company wants to know how much money was paid in dividends in the last reporting period.

What type of financial statement should he look at?

Cash flow statement

Statement of changes in equity

Balance sheet

Income statement

CONCEPT

Introducing Financial Statements

If a balance sheet shows owner's equity of $10 million, current liabilities of $6 million and long-term liabilities of $15 million, then what are the total assets of the company?

$25 million

$16 million

$31 million

$19 million

CONCEPT

The Balance Sheet

Capacity planning answers the question "__________"

What will our revenue be?

How can we be most efficient?

How will we decide which direction to go?

How will we finance it?

CONCEPT

Financial Forecasting

For which company can trend analysis be most useful?

An established hotel company that has made very few changes to its business model

A ride-sharing company whose business model has been rapidly adapting to market conditions

An insurance company that has recently been subject to new accounting laws

A manufacturing company that has recently expanded into mining as well

CONCEPT

Using Financial Ratios for Analysis

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

What is the cash conversion cycle?

How much product on hand is too much?

How will our cash inflows be affected?

How quickly can we replenish goods?

CONCEPT

Analyzing Forecasts

What was one outcome of the Sarbanes-Oxley Act of 2002?

CEOs are prohibited from earning bonuses tied to company stock performance.

Expenses related to corporate compliance are now tax-deductible.

Public corporations are no longer required to use independent auditors to review their accounting practices.

Top management of U.S. companies must now individually and personally certify the accuracy of financial information.

CONCEPT

Corporate Governance

A software company issues shares of stock to the public for the first time in order to raise funds for a planned product expansion.

What financial market is the company participating in?

Secondary capital market

Primary money market

Secondary money market

Primary capital market

CONCEPT

Financial Markets

Ratios that measure the value of a company's stock are __________.

asset management ratios

market ratios

liquidity ratios

leverage ratios

CONCEPT

Overview of Ratio Analysis

Which of the following is an example of an agency conflict?

Board oversight

Shareholder voting rights

Manager's salary

Managerial self-dealing

CONCEPT

Agency and Conflicts of Interest

Consider the following information:

Total current assets $62,301

Deferred income taxes $1,345

Inventories $5,664

Prepaid expenses $2,034

Other assets $2,906

Total current liabilities $29,748

What is the quick ratio?

2.09

1.82

1.90

2.02

CONCEPT

Liquidity Ratios

Consider the P/E ratios of the following companies:

·Company A: 7.4

·Company B: 11.3

·Company C: 14.8

·Company D: 9.1

Among these four companies, Company C has the __________.

highest dollar price

lowest net income

lowest relative value

highest relative value

CONCEPT

Market Value Ratios

Georgia is interested in selling her company. Before seeking a buyer, she wants her income statements to show a trend of increasing gross profits.

How can she achieve her goal?

Reduce operating expense

Reduce net sales

Reduce cost of goods sold

Reduce taxes paid

CONCEPT

The Income Statement

Preparing a cash flow forecast helps a company to avoid __________.

liquidity

opportunity costs

higher financing costs

net losses

What is one significance of the DuPont equation?

It allows a company to increase its stock price.

It tells a company whether its share price is correctly valued.

It allows a company to compare itself to companies in unrelated industries.

It tells a company how well it uses investment funds to generate earnings growth.

Which of the following would explain a company’s day sales outstanding ratio falling from 37.3 to 25?

The company's cost of goods sold has decreased while total sales has increased.

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

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

The company's cost of goods sold has decreased while total sales has remained constant.

You would like to have $8,000 in an account after four years' time.

If the account earns 4% compounded interest yearly, how much would you have to deposit today?

$7,249

$6,838

$7,692

$6,897

CONCEPT

Present Value, Single Cash Flows

Select the true statement about interest rate risk.

It stems from the fact that bond prices and market interest rates are inversely correlated.

It is the risk that a bond's coupon payment will fall if market interest rates fall.

Interest rate risk is particularly problematic for investors who do not wish to sell their bonds.

Shorter-term bonds are more sensitive to interest rate risk than longer-term bonds.

CONCEPT

Bond Risk

Which of the following accurately describes a flat yield curve?

A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy.

A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future.

A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth.

A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession.

CONCEPT

The Basics of Interest Rates

Select the pairing that is correctly matched.

Common stock: may only be sold on the secondary market

Preferred stock: the value of the stock is not affected by market factors

Common stock: usually has a pre-negotiated dividend

Preferred stock: stockholders' claim to assets is subordinate to that of debtholders

CONCEPT

Rules and Rights of Common and Preferred Stock

You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually.

What is the value of your $30,000 in five years?

$26,878

$27,000

$33,000

$33,122

CONCEPT

Future Value, Single Cash Flows

Which of the following best describes a bond?

A type of loan with a fixed rate of return that can be outstanding indefinitely.

A debt security that typically pays an investor a fixed rate of return for a specified period of time.

A debt security that gives an investor an ownership share in the entity issuing the bond.

A debt instrument whose rate of return can fluctuate based on market conditions.

CONCEPT

Understanding Bonds

Hunter is going to receive $3,000 in one year and he wants to know its equivalent value today.

The process of determining the answer is called ______.

pricing

discounting

compounding

rating

CONCEPT

Introduction to the Time Value of Money

A fund that is designed to follow a major stock index and represents an attractive, inexpensive option for investors is a(n) __________.

mutual fund

hedge fund

pension fund

exchange-traded fund

CONCEPT

Stock Markets

Select the best definition of an annuity-due.

An annuity whose payments are made at the end of the period

An annuity that has matured

An annuity whose payments can be made at any point during the period

An annuity whose payments are made at the beginning of the period

CONCEPT

Annuities

Select the statement that is true of preferred stock.

Preferred stock has less protection than common stock if a company goes bankrupt.

Preferred stock does not change in value.

Preferred stock can be converted into common stock.

Preferred stockholders have a degree of control over corporate policy.

CONCEPT

Types of Stock

Which of the following is true for calculating the future value of multiple cash flows?

It is simpler to find the FV of irregular cash flows than of annuities.

You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments.

To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV.

You can only find the FV of multiple cash flows if the payments occur with the same regularity.

CONCEPT

Valuing Multiple Cash Flows

Consider what you have learned about valuing bonds.

·A: Coupon rate = 3.5%, YTM = 4%

·B: Coupon rate = 3.2%, YTM = 3.2%

·C: Coupon rate = 2.8%, YTM = 3.5%

·D: Coupon rate = 4%, YTM = 3.7%

Which of the bonds is selling at a premium?

CONCEPT

Valuing Bonds

In calculating the yield of an investment, what is EAR equivalent to?

NPV

IRR

APY

APR

CONCEPT

Yield

Chen purchased a 30-year corporate bond in 2018 that promised to pay him 4% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2038.

Which of those numbers represents the bond's call feature?

2018

2038

CONCEPT

Key Characteristics of Bonds

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $0.85 per share

·Required return rate: 7%

·Constant growth rate: 4%

$28.33

$29.47

$30.32

$22.74

CONCEPT

Stock Valuation

When an investor purchases stock, he or she becomes a(n) __________ of the issuing company.

director

creditor

owner

employee

CONCEPT

Defining Stock

Which of the following is a disadvantage of bonds for a potential investor?

They have less legal protection than stocks.

Bondholders risk a significant price drop if a large number of bonds are sold at once.

Some bonds can be redeemed early by the issuer.

They are more likely than stocks to end up valueless if a company goes bankrupt.

CONCEPT

Advantages and Disadvantages of Bonds

Which descriptor relates to the asset-based approach for valuing corporations?

Considers the weighted average cost of capital

Analyzes what the company owns

Involves an analysis of risk

Multiplies the share price by number of shares outstanding

CONCEPT

Valuing the Corporation

Max is willing to take on a little risk when she buys a bond, but she wants to be compensated for her risk with an elevated interest rate.

What kind of bond should she buy?

Zero-coupon

Convertible

Subordinated

Inflation-linked

CONCEPT

Types of Bonds

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases.

The interest rate and the present value of an investment are directly related.

Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases.

Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.

CONCEPT

Additional Detail on Present and Future Values

An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________.

exchange-traded fund

mutual fund

index fund

hedge fund

CONCEPT

Stock Markets

Preemptive rights allow stockholders to acquire __________ before the general public.

dividends

new stock

company assets

preexisting shares

CONCEPT

Defining Stock

Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for the life of the loan.

Which of those numbers is the par value of the note?

1,000

1.125

CONCEPT

Key Characteristics of Bonds

Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment every three months instead of the traditional six months.

What type of bond should she buy?

Government

Zero-coupon

Fixed-rate

Floating-rate

CONCEPT

Types of Bonds

Select the statement that is true of preferred stock.

Preferred stock does not change in value.

Preferred stockholders have a degree of control over corporate policy.

Preferred stock has less protection than common stock if a company goes bankrupt.

Preferred stock can be converted into common stock.

CONCEPT

Types of Stock

Which of the following best describes a bond?

A debt security that gives an investor an ownership share in the entity issuing the bond.

A debt security that typically pays an investor a fixed rate of return for a specified period of time.

A type of loan with a fixed rate of return that can be outstanding indefinitely.

A debt instrument whose rate of return can fluctuate based on market conditions.

CONCEPT

Understanding Bonds

You make a loan of $400 with a 6% annual compounded interest for a period of seven years.

What is your $400 worth seven years later?

$601

$568

$199

$232

CONCEPT

Future Value, Single Cash Flows

Which of the following is true for calculating the future value of multiple cash flows?

To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV.

It is simpler to find the FV of irregular cash flows than of annuities.

You can only find the FV of multiple cash flows if the payments occur with the same regularity.

You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments.

CONCEPT

Valuing Multiple Cash Flows

Which of the following is an advantage of bonds for a potential investor?

Prices remain the same regardless of whether market interest rates change.

Since there is only one type of bond, they are easy to understand.

The interest rate on a bond can increase if a credit rating agency upgrades the bond.

They offer predictability when it comes to long-term financial planning.

CONCEPT

Advantages and Disadvantages of Bonds

Which of the following is the most accurate measure of how much interest you accrue on an investment?

NPV

APR

EAR

Nominal APR

CONCEPT

Yield

Select one advantage of an annuity for a borrower.

The payment amount may go down if interest rates fall.

The sum of all the payments will be less than the original loan amount.

Annuities do not charge interest.

It can be easier to make regular payments rather than a single lump sum.

CONCEPT

Annuities

Select the pairing that is correctly matched.

Common stock: usually has a pre-negotiated dividend

Preferred stock: the value of the stock is not affected by market factors

Common stock: may only be sold on the secondary market

Preferred stock: stockholders' claim to assets is subordinate to that of debtholders

CONCEPT

Rules and Rights of Common and Preferred Stock

You would like to have $10,000 in an account after eight years’ time.

If the account earns 2.5% compounded interest yearly, how much would you have to deposit today?

$8,333

$8,207

$9,765

$9,464

CONCEPT

Present Value, Single Cash Flows

Consider what you have learned about valuing bonds.

·A: Coupon rate = 4.5%, YTM = 5.2%

·B: Coupon rate = 5%, YTM = 4.5%

·C: Coupon rate = 3.5%, YTM = 3.75%

·D: Coupon rate = 4%, YTM = 4%

Which of the bonds is selling at par?

CONCEPT

Valuing Bonds

Which descriptor relates to the market-based approach for valuing corporations?

Considered the truest estimate

Involves the average cost of a unit of company income

Considers the weighted average cost of capital

Involves an analysis of risk

CONCEPT

Valuing the Corporation

Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120 in one year to account for the time value of money.

That extra $20 represents the __________.

present value

interest

pricing

discount

CONCEPT

Introduction to the Time Value of Money

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $1.30 per share

·Required return rate: 7%

·Constant growth rate: 5%

$63.75

$69.55

$65.00

$68.25

CONCEPT

Stock Valuation

Select the true statement about default risk.

Bondholders are guaranteed to be repaid in full if a company enters bankruptcy.

Default risk relates to a bond's periodic coupon payments, but not to its maturity payment.

Bondholders have a degree of legal protection against default risk, but it is not comprehensive.

It is the risk that the bond's price will fall below its par value.

CONCEPT

Bond Risk

Which of the following accurately describes an inverted yield curve?

A negatively sloping curve that may be an indication that the economy is about to enter a period of contraction.

A positively sloping curve that indicates that investors are uncertain about the direction of the economy.

A negatively sloping curve that may indicate that the economy is about to enter a period of inflationary growth.

A positively sloping curve that may indicate that the economy is about to enter a deflationary period.

CONCEPT

The Basics of Interest Rates

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.

Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases.

The interest rate and the present value of an investment are directly related.

Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases.

CONCEPT

Additional Detail on Present and Future Values

Select the pairing that is correctly matched.

Preferred stock: the value of the stock is not affected by market factors

Common stock: may only be sold on the secondary market

Preferred stock: stockholders' claim to assets is subordinate to that of debtholders

Common stock: usually has a pre-negotiated dividend

CONCEPT

Rules and Rights of Common and Preferred Stock

A corporation that makes shares of stock available for the public to purchase is an example of an __________.

intermediary

investor

investment trust

issuer

CONCEPT

Stock Markets

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.

Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases.

The interest rate and the present value of an investment are directly related.

Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases.

CONCEPT

Additional Detail on Present and Future Values

Which of the following accurately describes a flat yield curve?

A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession.

A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future.

A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth.

A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy.

CONCEPT

The Basics of Interest Rates

Consider what you have learned about valuing bonds.

·A: Coupon rate = 2.5%, YTM = 3%

·B: Coupon rate = 3%, YTM = 2.75%

·C: Coupon rate = 3.5%, YTM = 3.5%

·D: Coupon rate = 4%, YTM = 3.5%

Which of the bonds is selling at a discount?

CONCEPT

Valuing Bonds

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $2.75 per share

·Required return rate: 8.5%

·Constant growth rate: 6%

$119.35

$114.70

$116.60

$110.00

CONCEPT

Stock Valuation

In the case of liquidation, shareholders have a right to company assets after __________.

directors

founders

debt-holders

owners

CONCEPT

Defining Stock

Select the true statement about interest rate risk.

It stems from the fact that bond prices and market interest rates are inversely correlated.

Interest rate risk is particularly problematic for investors who do not wish to sell their bonds.

It is the risk that a bond's coupon payment will fall if market interest rates fall.

Shorter-term bonds are more sensitive to interest rate risk than longer-term bonds.

CONCEPT

Bond Risk

In calculating the yield of an investment, what is the relationship between APR and APY?

APR can be higher or lower than the APY of a compounding investment, depending on how high the interest rate is.

APR is always slightly lower than APY if an investment is earning compounding interest.

APR and APY are two ways of expressing the same measurement of yield.

APR is always slightly higher than APY if an investment is earning compounding interest.

CONCEPT

Yield

Max is willing to take on a little risk when she buys a bond, but she wants to be compensated for her risk with an elevated interest rate.

What kind of bond should she buy?

Inflation-linked

Zero-coupon

Subordinated

Convertible

CONCEPT

Types of Bonds

You would like to have $8,000 in an account after four years' time.

If the account earns 4% compounded interest yearly, how much would you have to deposit today?

$7,692

$6,897

$6,838

$7,249

CONCEPT

Present Value, Single Cash Flows

Select the statement that is true of preferred stock.

Preferred stock is generally thought to be more risky than common stock.

Preferred stock is not considered equity.

Owners of preferred stock have a stronger claim to a company's assets than owners of common stock.

Owners of preferred stock have more voting rights than owners of common stock.

CONCEPT

Types of Stock

Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120 in one year to account for the time value of money.

That extra $20 represents the __________.

pricing

discount

present value

interest

CONCEPT

Introduction to the Time Value of Money

Which of the following is a disadvantage of bonds for a potential investor?

Some bonds can be redeemed early by the issuer.

Bondholders risk a significant price drop if a large number of bonds are sold at once.

They are more likely than stocks to end up valueless if a company goes bankrupt.

They have less legal protection than stocks.

CONCEPT

Advantages and Disadvantages of Bonds

Which of the following is true for calculating the future value of multiple cash flows?

You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments.

You can only find the FV of multiple cash flows if the payments occur with the same regularity.

It is simpler to find the FV of irregular cash flows than of annuities.

To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV.

CONCEPT

Valuing Multiple Cash Flows

Chen purchased a 30-year corporate bond in 2018 that promised to pay him 4% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2038.

Which of those numbers represents the bond's call feature?

2018

2038

CONCEPT

Key Characteristics of Bonds

Select the best definition of an annuity-due.

An annuity whose payments can be made at any point during the period

An annuity that has matured

An annuity whose payments are made at the beginning of the period

An annuity whose payments are made at the end of the period

CONCEPT

Annuities

You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually.

What is the value of your $30,000 in five years?

$33,000

$27,000

$33,122

$26,878

CONCEPT

Future Value, Single Cash Flows

Which descriptor relates to the asset-based approach for valuing corporations?

Multiplies the share price by number of shares outstanding

Considers the weighted average cost of capital

Analyzes what the company owns

Involves an analysis of risk

CONCEPT

Valuing the Corporation

What effect would a CCC credit rating likely have on a bond?

The bond's interest rate would be unaffected because credit rating agencies are not considered impartial.

The bond would have a typical interest rate because the bond is considered investment grade.

The bond would have a lower interest rate because the credit rating is poor.

The bond would have a higher interest rate to compensate for increased risk.

CONCEPT

Nadia is going to receive $1,000 from her grandparents next year.

According to the time value of money, the gift of $1,000 is worth __________ a gift of $1,000 if she received it today.

the same as

twice as much as

less than

more than

CONCEPT

Introduction to the Time Value of Money

Consider what you have learned about valuing bonds.

·A: Coupon rate = 3.5%, YTM = 4%

·B: Coupon rate = 3.2%, YTM = 3.2%

·C: Coupon rate = 2.8%, YTM = 3.5%

·D: Coupon rate = 4%, YTM = 3.7%

Which of the bonds is selling at a premium?

CONCEPT

Valuing Bonds

Which of the following best describes a bond?

A debt security that gives an investor an ownership share in the entity issuing the bond.

A debt instrument whose rate of return can fluctuate based on market conditions.

A debt security that typically pays an investor a fixed rate of return for a specified period of time.

A type of loan with a fixed rate of return that can be outstanding indefinitely.

CONCEPT

Understanding Bonds

Which descriptor relates to the income approach for valuing corporations?

Estimates the cost of replacing a company's resources

Involves the capital asset pricing model

Reflects the equilibrium between buyers and sellers of company stock

Multiplies the share price by the number of shares outstanding

CONCEPT

Valuing the Corporation

Which of the following is true for calculating the present value of multiple cash flows?

All of the cash flows must be discounted to the same point in time.

You can only find the PV of multiple cash flows if they originate at the same time.

The PV of multiple cash flows is the sum of the FV of each individual cash flow divided by the interest rate.

It is more complex to find the PV of annuities than the PV of irregular cash flows.

CONCEPT

Valuing Multiple Cash Flows

Select the pairing that is correctly matched.

Preferred stock: stockholder receives interest from the issuer

Common stock: the issuer must honor any missed dividend payments

Preferred stock: cannot be converted for common stock shares

Common stock: the value of the stock is dependant upon the overall value of the company

CONCEPT

Rules and Rights of Common and Preferred Stock

Hans purchased a 20-year corporate bond in 2015 that promised to pay him 3% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2020.

Which of those numbers is the bond's maturity?

2020

2015

CONCEPT

Key Characteristics of Bonds

Bill wants to buy a bond whose face value is substantially higher than its market price.

What kind of bond should he buy?

Zero-coupon

Government

Asset-backed

Inflation-linked

CONCEPT

Types of Bonds

Select the best definition of an ordinary annuity.

An annuity whose payments are made at the beginning of the period

An annuity that makes payments forever

An annuity whose payments can be made at any point during the period

An annuity whose payments are made at the end of the period

CONCEPT

Annuities

Which of the following accurately describes a normal yield curve?

A negatively sloping curve that indicates the expectation that the economy will contract in the future.

A positively sloping curve that indicates confidence in sustained economic growth in the future.

A positively sloping curve that indicates the expectation that inflation will fall in the future.

A negatively sloping curve that indicates confidence in rising inflation in the future.

CONCEPT

The Basics of Interest Rates

Select the true statement about reinvestment risk.

It is the risk that a bond's price will fall below its par value.

A smart investor can eliminate reinvestment risk in addition to interest rate risk.

Reinvestment risk is inversely related to interest rate risk.

Callable bonds are less exposed to reinvestment risk.

CONCEPT

Bond Risk

Select the statement that is true of preferred stock.

Preferred stock has less protection than common stock if a company goes bankrupt.

Preferred stockholders have a degree of control over corporate policy.

Preferred stock does not change in value.

Preferred stock can be converted into common stock.

CONCEPT

Types of Stock

An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________.

exchange-traded fund

hedge fund

index fund

mutual fund

CONCEPT

Stock Markets

You make a loan of $400 with a 6% annual compounded interest for a period of seven years.

What is your $400 worth seven years later?

$601

$199

$568

$232

CONCEPT

Future Value, Single Cash Flows

In calculating the yield of an investment, what is EAR equivalent to?

APY

NPV

APR

IRR

CONCEPT

Yield

Preemptive rights allow stockholders to acquire __________ before the general public.

preexisting shares

dividends

company assets

new stock

CONCEPT

Defining Stock

You would like to have $30,000 in an account after five years' time.

If the account earns 3% compounded interest yearly, how much would you have to deposit today?

$28,092

$29,126

$26,087

$25,878

CONCEPT

Present Value, Single Cash Flows

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $1.30 per share

·Required return rate: 7%

·Constant growth rate: 5%

$63.75

$65.00

$69.55

$68.25

CONCEPT

Stock Valuation

Which of the following is an advantage of bonds for a potential investor?

Since there is only one type of bond, they are easy to understand.

Prices remain the same regardless of whether market interest rates change.

They offer predictability when it comes to long-term financial planning.

The interest rate on a bond can increase if a credit rating agency upgrades the bond.

CONCEPT

Advantages and Disadvantages of Bonds

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases.

The interest rate and the present value of an investment are inversely related.

Assuming other variables stay the same, if the interest rate increases, the present value of an investment increases.

Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.

Which of the following is an advantage of bonds for a potential investor?

All bonds have the same interest rate, so they are predictable.

The diversity of bond types means they respond easily to market needs.

They typically generate higher returns than stocks.

Companies can choose to pay off bonds early.

Select the statement that is true of common stock.

Common stockholders do not have a right of first refusal when new stock is issued.

Despite having fewer financial protections, common stock typically outperforms preferred stock.

Companies issue dividends to common stockholders before preferred stockholders.

Common stock has a stronger claim to a company's assets than preferred stock.

Select the statement that correctly explains the relationship between interest rates and present or future value.

Assuming other variables stay the same, if the interest rate increases, the future value of an investment increases.

The interest rate and the future value of an investment are inversely related.

Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.

Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases.

Because a bond is a legal contract, what could happen if a borrower fails to meet their obligation?

The bond could be reevaluated by a rating agency.

The borrower could be required to prepare an offering memorandum.

The borrower could face bankruptcy proceedings.

The lender could then own the bond outright.

Select the pairing that is correctly matched.

Preferred stock: is a less stable investment than common stock with fewer rights of ownership

Common stock: holders can mail in their votes if they can't attend a company's annual general meeting

Preferred stock: may be purchased by converting common stock shares into preferred ones

Common stock: may come with an additional dividend provision attached to company financial goals

Which of the following is true for calculating the future value of multiple cash flows?

You can only find the FV of multiple cash flows if they all have the same interest rate.

To find the FV of multiple annuities, multiply the sum of all the present values by the interest rate plus time period.

If the cash flows aren't uniform, you must find the FV of each cash flow and then add them together.

It is more complex to find the FV of annuities than the FV of irregular cash flows.

You invest $1,000 in a stock that has a 15% chance of a 1% return, a 60% chance of a 5% return and a 25% chance of a 7% return.

What is your expected return after one year?

4.3%

4.9%

4.5%

5.3%

CONCEPT

Expected Return

Which of the following credit ratings would make a country or company have the easiest time raising capital?

BBB

AAA

CONCEPT

The Impact of News of Expected Returns

A security that falls above the security market line has __________.

a low expected return and a low price

a high expected return and a high price

a high expected return and a low price

a low expected return and a high price

CONCEPT

Understanding the Security Market Line

Using the following variables, calculate an organization's cost of debt on a $500,000 bond.

·Rf: 1%

·credit-risk rate: 5%

·t: 15%

$4,500

$30,000

$29,550

$25,500

CONCEPT

Valuing Different Costs

Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends.

What was her total percentage return on the investment?

13.33%

25.00%

19.83%

28.85%

CONCEPT

Understanding Returns

The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________.

liquidity risk

asset-backed risk

model risk

prepayment risk

CONCEPT

Risk

The discounted cash flow approach is useful for __________.

graphing an asset's position on the security market line

determining the value of a company’s publicly traded equity

evaluating whether an asset is over-valued, under-valued or correctly priced

determining the value of future profits (or losses) in today’s terms

CONCEPT

Approaches to Calculating the Cost of Capital

You own a small manufacturing business that produces widgets. You have spent $150,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $2 to make and they sell for $15 each, so your variable cost is 13.3% of the overall revenue.

At your current level of operating leverage, how many widgets must you sell to break even?

11,539

10,000

19,950

13,482

CONCEPT

Thinking About Operating Leverage

Which of the following is true of systematic risk?

It cannot be diversified away by holding a pool of individual assets.

It is less tightly linked to the market as a whole than unsystematic risk.

It does not require additional compensation in terms of expected return.

An investor can avoid this type of risk through calculated investment choices.

CONCEPT

Diversification

Calculate a company's total leverage given the following information:

·Change in sales = 7%

·Change in earnings = 10%

0.7

Cannot calculate without net income data

Cannot calculate without EBIT data

1.43

CONCEPT

Thinking About Financial Leverage

Which of the following portfolios theoretically diversifies away the most risk?

One whose investments are highly correlated

One whose investments have a negative covariance

One whose investments have a large covariance

One whose investments have zero correlation

CONCEPT

Implications Across Portfolios

Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds.

By doing so, which federal regulation is he complying with?

Securities Act of 1933

Securities Act Amendments of 1975

Securities Exchange Act of 1934

Sarbanes-Oxley Act of 2002

CONCEPT

Market Regulation

Which of the following is true of portfolio diversification?

A diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type.

A diversified portfolio containing positively correlated investments has a lower variance than a portfolio containing a single asset type.

A diversified portfolio containing positively correlated investments has a higher variance than a portfolio containing a single asset type.

A diversified portfolio containing negatively correlated investments has a higher variance than a portfolio containing a single asset type.

CONCEPT

Portfolio Considerations

One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.

debt interest payments are tax-deductible

equity increases volatility

too much equity raises the risk of bankruptcy

the company will be less leveraged

What is the amount of money foregone by investing in one asset compared to another known as?

The overall cost of capital

The opportunity cost of capital

The required rate of return on capital

The weighted average cost of capital

CONCEPT

The Basics of the Cost of Capital

Company A Company B

Market Value of Equity $400,000 $600,000

Market Value of Debt $100,000 $800,000

Cost of Equity 9% 9%

Cost of Debt 3% 4%

Tax Rate 35% 35%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%?

Neither Company A nor Company B

Only Company A

Both Company A and Company B

Only Company B

CONCEPT

The WACC

Select the true statement about the bankruptcy process.

A Chapter 7 bankruptcy allows a company to restructure its debt.

A bankruptcy reorganization plan is voted on by a company's shareholders.

A company receives a stay from any collections activity after filing a bankruptcy petition.

Corporations file bankruptcy petitions with the states.

CONCEPT

Understanding the Bankruptcy Process

A social media start-up wants to raise funds to support growth by offering shares to a select group of investors.

What type of market transaction should they pursue?

IPO

Secondary market offering

Share buyback

Private placement

CONCEPT

The Security Markets

Which of the following is a tenet of strong-form efficiency?

Future prices cannot be predicted based on past prices.

Some forms of technical analysis techniques can be useful for producing excess returns.

Share prices respond immediately to all information, whether public or private.

Investors can use the past prices of securities to predict their future prices.

CONCEPT

Market Efficiency

Marty receives a tip that the price of shares of an oil company are about to fall significantly. In order to avoid a huge loss, he goes into his online brokerage account and sells all of the stock that he owns in the oil company.

What type of market transaction is taking place?

Secondary market offering

Share buyback

Primary market offering

Private placement

CONCEPT

The Security Markets

Using the following variables, calculate an organization's cost of common equity.

·Rf: 1.5%

·βs: 1.4

·(Rm – Rf): 8%

10.2%

12.7%

9.7%

11.6%

CONCEPT

Valuing Different Costs

You invest $3,000 in a stock that has a 10% chance of a 2% return, a 70% chance of a 6% return and a 20% chance of a 15% return.

What is your expected return after one year?

7.4%

5.6%

6.0%

8.8%

CONCEPT

Expected Return

Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds.

By doing so, which federal regulation is he complying with?

Securities Act Amendments of 1975

Securities Exchange Act of 1934

Securities Act of 1933

Sarbanes-Oxley Act of 2002

CONCEPT

Market Regulation

Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class?

Because bonds typically have a high variance and stocks typically have a low variance.

Because stocks and bonds are positively correlated.

Because stocks and bonds are negatively correlated.

Because the markets for stocks and bonds tend to move in the same direction at the same time.

CONCEPT

Portfolio Considerations

Calculate a company's total leverage given the following information:

·Net income = $80,000

·Revenue = $120,000

·Variable costs = $25,000

1.14

1.19

Cannot calculate without EPS data

Cannot calculate without knowing degree of financial leverage

CONCEPT

Thinking About Financial Leverage

Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends.

What was her total percentage return on the investment?

13.33%

19.83%

28.85%

25.00%

CONCEPT

Understanding Returns

Company A Company B

Market Value of Equity $400,000 $600,000

Market Value of Debt $100,000 $800,000

Cost of Equity 9% 9%

Cost of Debt 3% 4%

Tax Rate 35% 35%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%?

Both Company A and Company B

Neither Company A nor Company B

Only Company A

Only Company B

CONCEPT

The WACC

The capital asset pricing model is useful for __________.

assessing the ratio between risk and return on an investment

determining the discount rate on a company's long-term debt

projecting a company's future performance

valuing the net present value of a project

CONCEPT

Approaches to Calculating the Cost of Capital

You own a small manufacturing business that produces widgets. You have spent $100,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $4 to make and they sell for $22 each, so your variable cost is 18.2% of the overall revenue.

At your current level of operating leverage, how many widgets must you sell to break even?

9,450

5,556

18,200

4,546

CONCEPT

Thinking About Operating Leverage

Which of the following is true of unsystematic risk?

The correlation among the returns of assets within a portfolio are irrelevant to this type of risk.

Its presence commands a return in excess of the risk-free rate.

It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets.

It is also known as non-diversifiable risk.

CONCEPT

Diversification

A company is considering a new plan for its capital structure.

Which of the following is true if, under the new plan, the company's weighted average cost of capital exceeds the expected return?

The company's cost of capital is still at a comfortable level.

The company's proposed capital structure may put it at risk for bankruptcy.

The company is over-leveraged.

The company's value will increase.

Which of the following portfolios theoretically diversifies away the most risk?

One whose investments have zero correlation

One whose investments have a large covariance

One whose investments are highly correlated

One whose investments have a negative covariance

CONCEPT

Implications Across Portfolios

Select the true statement about the bankruptcy process.

A company receives a stay from any collections activity after filing a bankruptcy petition.

Corporations file bankruptcy petitions with the states.

A bankruptcy reorganization plan is voted on by a company's shareholders.

A Chapter 7 bankruptcy allows a company to restructure its debt.

CONCEPT

Understanding the Bankruptcy Process

The risk that your investment in a stock will lose value because the company's labor force goes on strike is known as __________.

market risk

asset-backed risk

default risk

operational risk

CONCEPT

Risk

What is the amount of money foregone by investing in one asset compared to another known as?

The weighted average cost of capital

The overall cost of capital

The opportunity cost of capital

The required rate of return on capital

CONCEPT

The Basics of the Cost of Capital

Which of the following credit ratings would make a country or company have the easiest time raising capital?

BBB

AAA

CONCEPT

The Impact of News of Expected Returns

Which of the following is a tenet of semi-strong-form efficiency?

Share prices respond immediately to new information that is made public.

Individual investors can "beat" the market if enough information is made public.

Historical data can be used to generate excess returns in the present day.

Some forms of fundamental analysis can provide investors excess returns.

CONCEPT

Market Efficiency

A security that falls above the security market line is __________.

over-valued for its level of risk

attractive for a company raising capital

attractive for an investor

correctly valued for its level of risk

CONCEPT

Understanding the Security Market Line

At your current level of operating leverage, how many widgets must you sell to break even?

4,546

18,200

5,556

9,450

CONCEPT

Thinking About Operating Leverage

What is the benefit of choosing an exchange-traded fund over an individual stock?

An exchange-traded fund has a higher variance than an individual stock.

An exchange-traded fund is diversified and therefore carries less risk than an individual stock.

An exchange-traded fund will have a higher return than an individual stock.

An exchange-traded fund eliminates more systemic risk than an individual stock.

CONCEPT

Portfolio Considerations

The discounted cash flow approach is useful for __________.

determining the value of a company’s publicly traded equity

evaluating whether an asset is over-valued, under-valued or correctly priced

determining the value of future profits (or losses) in today’s terms

graphing an asset's position on the security market line

CONCEPT

Approaches to Calculating the Cost of Capital

A security that falls below the security market line has __________.

a high expected return and a low price

a high expected return and a high price

a low expected return and a high price

a low expected return and a low price

CONCEPT

Understanding the Security Market Line

The risk that your investment in a stock will lose value because the company's labor force goes on strike is known as __________.

asset-backed risk

default risk

market risk

operational risk

CONCEPT

Risk

Calculate a company's total leverage given the following information:

·Change in sales = 5.5%

·Change in earnings = 7%

0.79

Cannot calculate without ROE data

1.27

Cannot calculate without EBIT data

CONCEPT

Thinking About Financial Leverage

Which of the following credit ratings would make a country or company have the easiest time raising capital?

BBB

AAA

CONCEPT

The Impact of News of Expected Returns

As a securities dealer, Patrick is able to easily know and compare the prices of stocks, which are now consolidated in a national market system.

Which federal regulation established this process?

Securities Exchange Act of 1934

Securities Act of 1933

Sarbanes-Oxley Act of 2002

Securities Act Amendments of 1975

CONCEPT

Market Regulation

What is the amount of money foregone by investing in one asset compared to another known as?

The required rate of return on capital

The opportunity cost of capital

The overall cost of capital

The weighted average cost of capital

CONCEPT

The Basics of the Cost of Capital

You invest $3,000 in a stock that has a 10% chance of a 2% return, a 70% chance of a 6% return and a 20% chance of a 15% return.

What is your expected return after one year?

5.6%

6.0%

8.8%

7.4%

CONCEPT

Expected Return

Select one reason a company's capital structure may include more equity than debt.

Taking on more equity means that a company will be more leveraged.

Too much debt will decrease a company's volatility.

Equity has significant tax advantages that debt does not.

Relying too heavily on debt can increase the interest rate that a company must pay on its debt.

Which of the following is true of unsystematic risk?

It is also known as non-diversifiable risk.

The correlation among the returns of assets within a portfolio are irrelevant to this type of risk.

Its presence commands a return in excess of the risk-free rate.

It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets.

CONCEPT

Diversification

Company A Company B

Market Value of Equity $400,000 $600,000

Market Value of Debt $100,000 $800,000

Cost of Equity 9% 9%

Cost of Debt 3% 4%

Tax Rate 35% 35%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%?

Neither Company A nor Company B

Only Company A

Only Company B

Both Company A and Company B

CONCEPT

The WACC

Select the true statement about the bankruptcy process.

Corporations file bankruptcy petitions with the states.

A bankruptcy reorganization plan is voted on by a company's shareholders.

A company receives a stay from any collections activity after filing a bankruptcy petition.

A Chapter 7 bankruptcy allows a company to restructure its debt.

CONCEPT

Understanding the Bankruptcy Process

Curtis purchased stock with an initial share price of $140, and sold it when the share price was $119. While he owned the stock, he earned $10 in dividends.

What was his total percentage return on the investment?

-9.24%

-7.86%

-15.00%

-17.65%

CONCEPT

Understanding Returns

Which of the following is a tenet of strong-form efficiency?

Share prices respond immediately to all information, whether public or private.

Future prices cannot be predicted based on past prices.

Some forms of technical analysis techniques can be useful for producing excess returns.

Investors can use the past prices of securities to predict their future prices.

CONCEPT

Market Efficiency

Using the following variables, calculate an organization's cost of common equity.

·Rf: 1.5%

·βs: 1.4

·(Rm – Rf): 8%

9.7%

12.7%

10.2%

11.6%

CONCEPT

Valuing Different Costs

What type of market transaction is taking place?

Primary market offering

Private placement

Share buyback

Secondary market offering

CONCEPT

The Security Markets

If a portfolio regularly falls twice as much as a benchmark index rises, the portfolio's beta coefficient is __________.

2.0%

0.5%

-0.5%

-2.0%

CONCEPT

Implications Across Portfolios

One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.

the company will be less leveraged

debt interest payments are tax-deductible

equity increases volatility

too much equity raises the risk of bankruptcy

Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends.

What was her total percentage return on the investment?

25.00%

19.83%

28.85%

13.33%

CONCEPT

Understanding Returns

At your current level of operating leverage, how many widgets must you sell to break even?

13,482

10,000

19,950

11,539

CONCEPT

Thinking About Operating Leverage

Which of the following is true of systematic risk?

It cannot be diversified away by holding a pool of individual assets.

An investor can avoid this type of risk through calculated investment choices.

It is less tightly linked to the market as a whole than unsystematic risk.

It does not require additional compensation in terms of expected return.

CONCEPT

Diversification

Calculate a company's total leverage given the following information:

·Net income = $80,000

·Revenue = $120,000

·Variable costs = $25,000

Cannot calculate without EPS data

1.14

Cannot calculate without knowing degree of financial leverage

1.19

CONCEPT

Thinking About Financial Leverage

What is the effect on the stock price of a company that announces it earned higher-than-expected quarterly profits?

The stock price will likely go up because the announcement suggests that the company is undervalued.

The stock price will likely go down because analysts do not like unexpected surprises from company financial reporting.

The stock price will likely go up because it's a clear indication that the financial health of the company is strong.

The effect depends on what generated the profits and how analysts forecast this information.

CONCEPT

The Impact of News of Expected Returns

Company A Company B

Market Value of Equity $700,000 $900,000

Market Value of Debt $300,000 $200,000

Cost of Equity 8% 10%

Cost of Debt 1.5% 3%

Tax Rate 30% 25%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 7%?

Only Company A

Only Company B

Neither Company A nor Company B

Both Company A and Company B

CONCEPT

The WACC

A security that falls above the security market line is __________.

correctly valued for its level of risk

attractive for an investor

over-valued for its level of risk

attractive for a company raising capital

CONCEPT

Understanding the Security Market Line

You invest $7,000 in a stock that has a 25% chance of a 6% return, a 35% chance of a 9% return and a 40% chance of a 10% return.

What is your expected return after one year?

8.65%

8.25%

9.00%

7.85%

CONCEPT

Expected Return

Using the following variables, calculate an organization's cost of preferred stock.

·Dpref: $4

·Ppref: $30

·g: 2%

$12.66%

15.33%

15%

24%

CONCEPT

Valuing Different Costs

The capital asset pricing model is useful for __________.

determining the discount rate on a company's long-term debt

valuing the net present value of a project

assessing the ratio between risk and return on an investment

projecting a company's future performance

CONCEPT

Approaches to Calculating the Cost of Capital

The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________.

prepayment risk

liquidity risk

model risk

asset-backed risk

CONCEPT

Risk

If you invest in two stocks, and their values both rise on one day and then fall on the next day, they have __________.

a large covariance

a zero covariance

a positive beta value

a negative beta value

CONCEPT

Implications Across Portfolios

Which of the following is a tenet of semi-strong-form efficiency?

Historical data can be used to generate excess returns in the present day.

Share prices respond immediately to new information that is made public.

Individual investors can "beat" the market if enough information is made public.

Some forms of fundamental analysis can provide investors excess returns.

CONCEPT

Market Efficiency

A social media start-up wants to raise funds to support growth by offering shares to a select group of investors.

What type of market transaction should they pursue?

IPO

Share buyback

Secondary market offering

Private placement

CONCEPT

The Security Markets

What is the weighted average cost of capital for a borrower equivalent to?

The calculated required return of all sources of capital

The valuation of the company's equity

The opportunity cost of foregone investments

The net present value of all current investments

CONCEPT

The Basics of the Cost of Capital

Which of the following is true of portfolio diversification?

A diversified portfolio containing positively correlated investments has a lower variance than a portfolio containing a single asset type.

A diversified portfolio containing negatively correlated investments has a higher variance than a portfolio containing a single asset type.

A diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type.

A diversified portfolio containing positively correlated investments has a higher variance than a portfolio containing a single asset type.

CONCEPT

Portfolio Considerations

Select the true statement about the bankruptcy process.

Companies that reorganize under Chapter 11 are guaranteed a lower cost of capital in the future.

A Chapter 11 bankruptcy can be quite complicated and can take a long time to complete.

A company must still pay its debts on time while in bankruptcy.

A Chapter 7 bankruptcy is the least common form of bankruptcy for businesses.

CONCEPT

Understanding the Bankruptcy Process

Mason is a financial analyst who specializes in securities. When providing an analysis of securities to which he has a personal connection, he discloses his conflict of interest.

By doing so, which federal regulation is he complying with?

Securities Exchange Act of 1934

Securities Act Amendments of 1975

Sarbanes-Oxley Act of 2002

Securities Act of 1933

Which of the following is true of systematic risk?

It is affected by the level of diversification within a portfolio.

It can be hedged against by choosing investments with negative correlations.

Research shows that investors can best mitigate this type of risk by holding ≤ 30 assets within a portfolio.

It is the risk associated with a general downward turn of the market or a market segment.

Lee purchased stock with an initial share price of $32, and sold it when the share price was $50. While he owned the stock, he earned $2 in dividends.

What was his total percentage return on the investment?

40.00%

36.00%

62.50%

56.25%

The risk that a bank will receive less interest from a lending product than it originally anticipated is known as __________.

operational risk

interest rate risk

market risk

prepayment risk

A stock's beta, which can be affected by surprise news or announcements, is a measure of its __________ in relation to a benchmark like an index fund.

price

volatility

yield

credit rating

Like the capital asset pricing model, the bond yield plus risk premium (BYPRP) approach is useful for __________.

estimating the equity risk premium

determining whether it makes financial sense to pursue a new project

calculating the relative time value of money of projected cash flows

estimating the required return on a company's equity

Which of the following is a tenet of weak-form efficiency?

The market is impossible to predict because investors make decisions in a biased, emotionally-driven fashion.

Analyzing patterns in the past pricing of securities will not yield information that will enable investors to "beat" the market.

Markets, in general, are informationally inefficient, so investors can earn excess returns by studying patterns.

The prices of securities reflect all known present information, but do not account for past publicly available information.

Company A Company B

Market Value of Equity $250,000 $200,000

Market Value of Debt $600,000 $500,000

Cost of Equity 8% 10%

Cost of Debt 2% 2%

Tax Rate 35% 30%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5%?

Only Company B

Neither Company A nor Company B

Only Company A

Both Company A and Company B

Select the true statement about the bankruptcy process.

Filing for bankruptcy is the best way for a company to remedy financial distress.

A Chapter 11 bankruptcy is a liquidation filing.

In a Chapter 7 bankruptcy, creditors are guaranteed to recoup at least part of what is owed to them.

Companies that cannot meet their debts can try to reduce their debt obligations before filing for bankruptcy.

A successful ride-sharing company has decided to raise money for its second phase of expansion by issuing shares of stock and becoming a publicly-traded company, so they create a prospectus for potential investors.

What type of stock market transaction is taking place?

Private placement

IPO

Share buyback

Secondary market offering

What is the combination of debt and equity used by a company to finance its activities known as?

Capital structure

Net present value

Leverage

Portfolio theory

When performing capital budgeting and considering replacement projects, one factor that must be considered is the potential __________ of equipment that is no longer needed.

taxation

depreciation

salvage value

sunk costs

CONCEPT

Cash Flow Analysis and Other Factors

According to the residual dividend model, what takes priority over distributing dividends?

Paying off debt

Increasing share price

Establishing a target payout ratio

Financing planned projects

CONCEPT

Setting the Dividend

In what way are debt securities, equity securities and derivatives similar?

They all confer ownership in a business.

They all have fixed terms.

They can all be used to hedge against risk.

Their value is derived from an underlying asset.

CONCEPT

Securities Management

A construction company is preparing a capital budget and considering four long-term investments. The profitability index of each project is as follows:

·Project A: 0.34

·Project B: 1.12

·Project C: 1.26

·Project D: 0.93

In theory, which two projects should the company pursue?

Projects A and D

Projects B and C

Projects A and C

Projects B and D

CONCEPT

Introduction to Capital Budgeting

Which of the following is true of venture capital?

Venture capitalists reserve the right to sell their portion of company shares before an IPO.

Venture capital is comparable to a bank loan, which must be repaid over time.

One way venture capitalists evaluate potential investments is by analyzing a company's share price.

On average, venture capital investors seek a return on their investment in about five years.

CONCEPT

Venture Capital

What is one advantage of NPV as a capital budget method?

Cash flows and the discount rate are easy to accurately determine.

It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk.

It accounts fully for opportunity costs.

It is equally accurate whether cash flows are known or estimated.

CONCEPT

Net Present Value

Which of the following types of financing is typical for a business in its mature stage?

Equity

Bank loans

Second-round venture capital

Start-up venture capital

CONCEPT

Types of Financing

Farrah owns 500 shares of stock valued at $30/share in Company A.

After the company issues a 3% stock dividend, what does Farrah own?

500 shares valued at $30/share

515 shares valued at $29.13/share

515 shares valued at $30/share

500 shares valued at $30.90/share

CONCEPT

Cash Dividend Alternatives

Alyx needs additional short-term financing to modify her children's clothing business. To generate funds, she sells her accounts receivable to an external party for slightly less than their book value.

What type of financing resource is Alyx using?

Trade credit

Commercial lending

Peer-to-peer lending

Factoring

CONCEPT

Short-Term Financing

Select one advantage of IRR as a capital budget method.

The IRR can easily be evaluated alongside a company's threshold rate.

It accurately reflects the reinvestment rate risk.

It is simple to understand because it ignores the time value of money.

It is more useful than NPV analysis when evaluating mutually exclusive projects.

CONCEPT

Internal Rate of Return

Which of the following is an example of an operational risk for a company that manufactures automobiles?

Damage to completed cars held on a storage lot

Rising interest rates that affect the terms of car loans, thereby decreasing demand

A state tax increase that makes buying and registering a car more expensive

A national car rental agency backing out of a contract to buy a certain volume of new cars

CONCEPT

Risk and Capital Budgeting

Which of the following describes the securities underwriting process?

A company sells its securities to an investment bank, who then sells the securities to market participants.

An investment bank helps to connect a private company with sources of capital.

An investment bank determines if a company can afford to go public.

An investment bank responsible for market liquidity quotes a bid price and an ask price for a security.

CONCEPT

The Role of Investment Banks in Financing

Ollie owned stock in a hotel company that announced a dividend, but he did not receive it.

This is because he sold the stock before the __________ date had passed.

record

ex-dividend

in-dividend

payment

CONCEPT

Introduction to Dividends

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A method of financing an asset like equipment without purchasing it outright with equity"

Capital lease

Operating lease

Both

Neither

CONCEPT

Leasing

When does a company know that it has sufficient working capital?

When it has cash reserves

When its working capital is positive

When it can meet all of its short-term expenses and debts with current assets

When its total assets are equal to its total liabilities

CONCEPT

Working Capital

A company invests $600,000 in a project with the following net cash flows:

·Year 1: $130,000

·Year 2: $113,000

·Year 3: $98,000

·Year 4: $92,000

·Year 5: $89,000

·Year 6: $95,000

In what year does payback occur?

After Year 6

Year 6

Year 4

Year 5

CONCEPT

The Payback Method

Which of the following investors would likely prefer a stock dividend over a cash dividend?

Bayne wants to delay paying taxes on his investments for as long as possible.

Jaden values having a regular stream of income from his investments.

Catrina is risk-averse and doesn't like to count on capital gains.

Aila prioritizes short-term outcomes over long-term ones in her investing choices.

CONCEPT

Dividend Policy

Place the following steps for developing a credit policy in the correct order of process:

·A: The company hopes that few customers will miss payments, so it decides to take no action to collect bad debts.

·B: The company decides that payments must be made within 45 days.

·C: The company decides that it's willing to lose sales in exchange for less bad debt risk.

B, C, A

C, B, A

B, A, C

C, A, B

CONCEPT

Accounts Receivable

Which inventory technique is most useful when a business has inventory that varies greatly in value?

ABC

FIFO

LIFO

Average cost

CONCEPT

Inventory Management

Which of the following is a goal of working capital management?

To manage long-term assets in a way that maximizes returns

To elongate the cash conversion cycle

To ensure liquidity while reducing opportunity costs

To generate as much free working capital as possible

CONCEPT

Working Capital Financing

A company has a 70-day operating cycle, with 15 payable days, 25 receivable days and 45 inventory days.

What is their cash conversion cycle?

CONCEPT

Cash Conversion Cycle

When managing its cash, a company should make use of float to __________.

make payments before they come due

increase the length of the disbursement cycle

set aside cash for future payments

decrease the length of time for a payment to clear the bank

CONCEPT

Cash Management

Select a reason why a company would want to go public.

To decrease administrative costs

To have access to cheaper capital than a private company would

To increase direct oversight from investors

To consolidate control of the company in the hands of management

CONCEPT

Comparing Public and Private Financing

A company has a 70-day operating cycle, with 15 payable days, 25 receivable days and 45 inventory days.

What is their cash conversion cycle?

CONCEPT

Cash Conversion Cycle

An auto manufacturing company is preparing a capital budget and considering four long-term investments. The net present value of each project is as follows:

·Project A: 0.25

·Project B: 0

·Project C: -0.5

·Project D: 1.5

In theory, which two projects should the company pursue?

Projects B and C

Projects A and D

Projects A and B

Projects B and D

CONCEPT

Introduction to Capital Budgeting

Select one disadvantage of IRR as a capital budget method.

Projects of similar durations are not easily compared using IRR.

It is only useful with projects that have negative cash flows.

It can obscure the planning of mutually exclusive projects if one project has a higher IRR and another has a higher NPV.

It involves complex calculations that are not always reliable.

CONCEPT

Internal Rate of Return

Which of the following describes derivatives, rather than debt securities or equity securities?

They are often used to offset external risks like changes in commodity pricing.

They are considered a liquid investment.

They are the least risky of the three.

They are a fixed-term security.

CONCEPT

Securities Management

When does a company know that it has sufficient working capital?

When it has cash reserves

When its total assets are equal to its total liabilities

When its working capital is positive

When it can meet all of its short-term expenses and debts with current assets

CONCEPT

Working Capital

Which of the following is an example of an operational risk for a company that manufactures automobiles?

Rising interest rates that affect the terms of car loans, thereby decreasing demand

A national car rental agency backing out of a contract to buy a certain volume of new cars

A state tax increase that makes buying and registering a car more expensive

Damage to completed cars held on a storage lot

CONCEPT

Risk and Capital Budgeting

Ollie owned stock in a hotel company that announced a dividend, but he did not receive it.

This is because he sold the stock before the __________ date had passed.

record

in-dividend

ex-dividend

payment

CONCEPT

Introduction to Dividends

Which of the following describes the securities underwriting process?

An investment bank helps to connect a private company with sources of capital.

A company sells its securities to an investment bank, who then sells the securities to market participants.

An investment bank determines if a company can afford to go public.

An investment bank responsible for market liquidity quotes a bid price and an ask price for a security.

CONCEPT

The Role of Investment Banks in Financing

When performing capital budgeting and considering replacement projects, one factor that must be considered is the potential __________ of equipment that is no longer needed.

sunk costs

salvage value

taxation

depreciation

CONCEPT

Cash Flow Analysis and Other Factors

Which of the following is a goal of working capital management?

To ensure liquidity and increase cash holding costs

To minimize free working capital and maximize opportunity costs

To balance adequate cash flow against maximal returns

To lengthen the span of time between payment of accounts payable and collection of accounts receivable

CONCEPT

Working Capital Financing

Which of the following investors would likely prefer a cash dividend over a stock dividend?

Paul doesn't mind taking on some additional risk if it means a larger reward down the road.

Zakir wants to be able to purchase more shares so that he owns a larger stake in the company.

Vladamir chooses stocks strategically in order to maximize his capital gains.

Karen prefers knowing that the company she invested in has adequate liquidity.

CONCEPT

Dividend Policy

Which of the following is an advantage of venture capital?

There are no upfront costs to a company seeking venture capital funding.

Venture capital is typically easy to secure even with the most basic of business plans.

Venture capital investments typically carry a small amount of risk and generate small to moderate returns.

New companies can access large amounts of upfront capital that does not have to be repaid, as a loan would be.

CONCEPT

Venture Capital

What is one disadvantage of NPV as a capital budget method?

It is rarely used, so there is disagreement as to what an adequate NPV is.

It cannot be used to compare investments with different upfront costs.

It can be misleading if inputs like cash flow turn out to be wrong.

It does not deliver an overall picture of the gain or loss of implementing a project.

CONCEPT

Net Present Value

Which inventory technique is most useful when a business has inventory that varies greatly in value?

Average cost

FIFO

ABC

LIFO

CONCEPT

Inventory Management

A company invests $750,000 in a project with the following net cash flows:

·Year 1: $43,000

·Year 2: $48,000

·Year 3: $55,000

·Year 4: $36,000

·Year 5: $74,000

·Year 6: $65,000

In what year does payback occur?

Year 5

Year 4

Year 6

After Year 6

CONCEPT

The Payback Method

Kiran needs additional short-term financing for his robotics company, so he asks his suppliers if they could issue a discount if he pays his bills early.

What type of financing resource is Kiran using?

Trade credit

Barter

Factoring

Peer-to-peer lending

CONCEPT

Short-Term Financing

What does the residual dividend model mean for investors?

They should expect to consistently receive the same dividend.

They should expect to always receive very small dividends.

They should expect dividend distributions that are equal to net income.

They should expect a level of uncertainty regarding their dividends.

CONCEPT

Setting the Dividend

Select a reason why a company would want to go public.

To increase direct oversight from investors

To consolidate control of the company in the hands of management

To decrease administrative costs

To have access to cheaper capital than a private company would

CONCEPT

Comparing Public and Private Financing

Which of the following types of financing is typical for a business in its mature stage?

Second-round venture capital

Start-up venture capital

Bank loans

Equity

CONCEPT

Types of Financing

Place the following steps for developing a credit policy in the correct order of process:

·A: The company decides that it wants to minimize opportunity costs by having as much cash on hand as possible.

·B: The company decides that it will send out two notices of late payments to customers before pursuing other collection methods.

·C: The company decides that its payment terms will be Net 15.

A, B, C

A, C, B

C, A, B

C, B, A

CONCEPT

Accounts Receivable

Lennon owns 50 shares of stock in Company A that are valued at $10/share.

After Company A splits their stock at 2-for-1, what does Lennon own?

50 shares valued at $20/share

50 shares valued at $10/share

100 shares valued at $10/share

100 shares valued at $5/share

CONCEPT

Cash Dividend Alternatives

To manage cash efficiently, a company should try to collect payment for delivered products or services __________.

as quickly as possible

in a way that maximizes float time

within 60 days

infrequently

CONCEPT

Cash Management

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A method of financing an asset like equipment without purchasing it outright with equity"

Capital lease

Operating lease

Both

Neither

CONCEPT

Leasing

What does the residual dividend model mean for a company?

It helps a company attract investors who seek a high dividend payout ratio.

It allows a company to maintain a consistent dividend yield.

It prioritizes the company's growth over shareholder dividends.

It helps a company attract investors who seek a low dividend payout ratio.

CONCEPT

Setting the Dividend

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A way for a company to acquire equipment for a relatively short-term period, after which the equipment returns to the owner"

Capital lease

Operating lease

Both

Neither

CONCEPT

Leasing

What is the benefit to a company from a securities underwriter?

They help companies to receive a premium on the sale of their securities.

They help companies to reduce the risk associated with an IPO.

They study the market and advise companies on where to set their IPO share price.

They generate demand for a company's securities by giving them a strong credit rating.

CONCEPT

The Role of Investment Banks in Financing

Which of the following is a goal of working capital management?

To ensure liquidity and increase cash holding costs

To lengthen the span of time between payment of accounts payable and collection of accounts receivable

To minimize free working capital and maximize opportunity costs

To balance adequate cash flow against maximal returns

CONCEPT

Working Capital Financing

Which of the following is an example of a market risk for a company that manufactures automobiles?

Supply chain disruptions due to civil war in a country that supplies material

A downgrade in the company's credit rating

A massive lawsuit against the manufacturer over worker safety

A drop in demand due to the rise of ride-sharing as an alternative to automobile ownership

CONCEPT

Risk and Capital Budgeting

Which of the following types of financing is typical for a business in its mature stage?

Second-round venture capital

Equity

Bank loans

Start-up venture capital

CONCEPT

Types of Financing

Which inventory technique assumes that the most recently purchased inventory is sold first?

FIFO

LIFO

ABC

Average cost

CONCEPT

Inventory Management

Jerome needs funding to help start a business selling school supplies. He uses a website that connects him directly with a lender who charges a below-market interest rate.

What type of financing resource is Jerome using?

Factoring

Peer-to-peer lending

Commercial lending

Trade credit

CONCEPT

Short-Term Financing

A company has a 70-day operating cycle, with 15 payable days, 25 receivable days and 45 inventory days.

What is their cash conversion cycle?

CONCEPT

Cash Conversion Cycle

Select one disadvantage of IRR as a capital budget method.

It fails to account for the time value of money.

It can only be used with projects that have positive cash flows.

It can be difficult to interpret and understand.

It is not useful for comparing projects with different lifespans.

CONCEPT

Internal Rate of Return

What is one potential advantage of being a publicly-held company?

A public company may gain from greater investor involvement than a private company.

A public company has fewer requirements to meet when it comes to shareholder communication and reporting.

A public company always has a higher share price than a private company.

A public company may have a more prominent reputation than a private company.

CONCEPT

Comparing Public and Private Financing

Which of the following is a disadvantage of venture capital?

Companies that receive venture capital are prohibited from issuing an IPO once they become successful.

Receiving venture capital can send a message to other investors that your company is unlikely to succeed.

Venture capitalists only receive a return on their investment if the company is eventually purchased for a large sum.

Venture capital investors may place restrictions on company operations, such as setting salary caps.

CONCEPT

Venture Capital

When does a company know that it has sufficient working capital?

When it has cash reserves

When its working capital is positive

When it can meet all of its short-term expenses and debts with current assets

When its total assets are equal to its total liabilities

CONCEPT

Working Capital

Which of the following describes derivatives, rather than debt securities or equity securities?

They are the least risky of the three.

They are considered a liquid investment.

They are a fixed-term security.

They are often used to offset external risks like changes in commodity pricing.

CONCEPT

Securities Management

A company invests $750,000 in a project with the following net cash flows:

·Year 1: $43,000

·Year 2: $48,000

·Year 3: $55,000

·Year 4: $36,000

·Year 5: $74,000

·Year 6: $65,000

In what year does payback occur?

Year 5

After Year 6

Year 4

Year 6

CONCEPT

The Payback Method

Which of the following investors would likely prefer a stock dividend over a cash dividend?

Jaden values having a regular stream of income from his investments.

Catrina is risk-averse and doesn't like to count on capital gains.

Bayne wants to delay paying taxes on his investments for as long as possible.

Aila prioritizes short-term outcomes over long-term ones in her investing choices.

CONCEPT

Dividend Policy

When managing its cash, a company should make use of float to __________.

increase the length of the disbursement cycle

decrease the length of time for a payment to clear the bank

set aside cash for future payments

make payments before they come due

CONCEPT

Cash Management

What is one advantage of NPV as a capital budget method?

It accounts fully for opportunity costs.

It is equally accurate whether cash flows are known or estimated.

Cash flows and the discount rate are easy to accurately determine.

It is flexible, in the sense that the discount rate can be adjusted to account for factors like risk.

CONCEPT

Net Present Value

An electronics company is preparing a capital budget and considering four long-term investments. The payback period of each project is as follows:

·Project A: 4 years

·Project B: 5.2 years

·Project C: 2.4 years

·Project D: 3 years

In theory, which two projects should the company pursue?

Projects C and D

Projects A and C

Projects A and B

Projects B and D

CONCEPT

Introduction to Capital Budgeting

Rose is concerned about a stock in her portfolio because in recent periods, the dividend she has received for each share has gotten smaller while the share price has remained relatively constant.

What financial metric is Rose analyzing?

Dividend cover

Dividend yield

Payout ratio

Dividend per share

CONCEPT

Introduction to Dividends

Place the following steps for developing a credit policy in the correct order of process:

·A: The company hopes that few customers will miss payments, so it decides to take no action to collect bad debts.

·B: The company decides that payments must be made within 45 days.

·C: The company decides that it's willing to lose sales in exchange for less bad debt risk.

C, B, A

C, A, B

B, C, A

B, A, C

CONCEPT

Accounts Receivable

Aneeka owns 40 shares of stock in Company A that are valued at $15/share.

After Company A repurchases 5% of its outstanding shares on the open market, what does Aneeka own?

40 shares valued at a higher price/share

40 shares valued at a lower price/share

38 shares of stock valued at a higher price/share

38 shares of stock valued at a lower price/share

CONCEPT

Cash Dividend Alternatives

When performing capital budgeting, __________ incurred by a project are irrelevant to future investment decisions.

sunk costs

depreciation

taxes

opportunity costs

CONCEPT

Cash Flow Analysis and Other Factors

Select one disadvantage of IRR as a capital budget method.

It can obscure the planning of mutually exclusive projects if one project has a higher IRR and another has a higher NPV.

Projects of similar durations are not easily compared using IRR.

It is only useful with projects that have negative cash flows.

It involves complex calculations that are not always reliable.

CONCEPT

Internal Rate of Return

What is one disadvantage of NPV as a capital budget method?

Although the weighted average cost of capital is commonly used as the discount rate, it is not a perfect input.

It cannot be used to compare mutually exclusive investments.

It can only be used to evaluate bonds.

It can be very difficult to calculate, even if inputs like cash flows are quite clear.

CONCEPT

Net Present Value

When performing capital budgeting, cash flow analysis can help a company determine when to execute __________.

taxes

replacement projects

sunk costs

depreciation

CONCEPT

Cash Flow Analysis and Other Factors

Which of the following is an example of an operational risk for a company that manufactures automobiles?

A state tax increase that makes buying and registering a car more expensive

Damage to completed cars held on a storage lot

A national car rental agency backing out of a contract to buy a certain volume of new cars

Rising interest rates that affect the terms of car loans, thereby decreasing demand

CONCEPT

Risk and Capital Budgeting

A company with a 120-day operating cycle determines its cash conversion cycle using the following data:

·Receivable days: 35

·Inventory days: 95

·Payable days: 45

What is the company's cash conversion cycle?

165

105

CONCEPT

Cash Conversion Cycle

Which of the following is a goal of working capital management?

To manage long-term assets in a way that maximizes returns

To elongate the cash conversion cycle

To ensure liquidity while reducing opportunity costs

To generate as much free working capital as possible

CONCEPT

Working Capital Financing

A company invests $600,000 in a project with the following net cash flows:

·Year 1: $130,000

·Year 2: $113,000

·Year 3: $98,000

·Year 4: $92,000

·Year 5: $89,000

·Year 6: $95,000

In what year does payback occur?

After Year 6

Year 4

Year 6

Year 5

CONCEPT

The Payback Method

Which of the following is an advantage of venture capital?

New companies can access large amounts of upfront capital that does not have to be repaid, as a loan would be.

There are no upfront costs to a company seeking venture capital funding.

Venture capital is typically easy to secure even with the most basic of business plans.

Venture capital investments typically carry a small amount of risk and generate small to moderate returns.

CONCEPT

Venture Capital

Which of the following describes the securities underwriting process?

A company sells its securities to an investment bank, who then sells the securities to market participants.

An investment bank determines if a company can afford to go public.

An investment bank helps to connect a private company with sources of capital.

An investment bank responsible for market liquidity quotes a bid price and an ask price for a security.

CONCEPT

The Role of Investment Banks in Financing

What does the residual dividend model mean for investors?

They should expect dividend distributions that are equal to net income.

They should expect a level of uncertainty regarding their dividends.

They should expect to always receive very small dividends.

They should expect to consistently receive the same dividend.

CONCEPT

Setting the Dividend

In what way are debt securities, equity securities and derivatives similar?

Their value is derived from an underlying asset.

They all have fixed terms.

They all confer ownership in a business.

They can all be used to hedge against risk.

CONCEPT

Securities Management

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A method of financing an asset like equipment without purchasing it outright with equity"

Capital lease

Operating lease

Both

Neither

CONCEPT

Leasing

Select a reason why a company would want to go public.

To consolidate control of the company in the hands of management

To have access to cheaper capital than a private company would

To increase direct oversight from investors

To decrease administrative costs

CONCEPT

Comparing Public and Private Financing

A construction company is preparing a capital budget and considering four long-term investments. The profitability index of each project is as follows:

·Project A: 0.34

·Project B: 1.12

·Project C: 1.26

·Project D: 0.93

In theory, which two projects should the company pursue?

Projects A and D

Projects B and D

Projects B and C

Projects A and C

CONCEPT

Introduction to Capital Budgeting

Which of the following investors would likely prefer a cash dividend over a stock dividend?

Zakir wants to be able to purchase more shares so that he owns a larger stake in the company.

Paul doesn't mind taking on some additional risk if it means a larger reward down the road.

Karen prefers knowing that the company she invested in has adequate liquidity.

Vladamir chooses stocks strategically in order to maximize his capital gains.

CONCEPT

Dividend Policy

Lennon owns 50 shares of stock in Company A that are valued at $10/share.

After Company A splits their stock at 2-for-1, what does Lennon own?

50 shares valued at $10/share

100 shares valued at $10/share

100 shares valued at $5/share

50 shares valued at $20/share

CONCEPT

Cash Dividend Alternatives

With respect to payroll disbursements, one way a company can manage their cash more efficiently is to __________.

implement check kiting

increase float time

use lockbox banking

limit outsourcing

CONCEPT

Cash Management

What type of financing resource is Alyx using?

Peer-to-peer lending

Commercial lending

Trade credit

Factoring

CONCEPT

Short-Term Financing

Ollie owned stock in a hotel company that announced a dividend, but he did not receive it.

This is because he sold the stock before the __________ date had passed.

record

in-dividend

payment

ex-dividend

CONCEPT

Introduction to Dividends

Seed money is a type of financing appropriate for a company in what stage of development?

Decline

Introduction

Growth

Maturity

CONCEPT

Types of Financing

What type of inventory does paint that has been colored but not yet put into cans represent for a paint company?

Class C

Raw materials

Finished goods

Work in process

CONCEPT

Inventory Management

What can a business that has too little working capital do to increase it?

Decrease inventory

Increase short-term liabilities

Reduce current assets

Increase cash on hand

CONCEPT

Working Capital

Place the following steps for developing a credit policy in the correct order of process:

·A: The company decides that it will contact customers by phone if they are late on a payment.

·B: The company decides that it will not require customers to undergo a credit check.

·C: The company decides that it will reward loyal customers with a discount for early payment.

B, A, C

C, A, B

C, B, A

B, C, A

Which of the following is true of a market maker?

Market makers rate the creditworthiness of the issuer.

Market makers purchase a company's securities before an IPO and then resell them at a premium.

Market makers assist with market liquidity by facilitating the exchange of securities.

Market makers help companies to negotiate mergers and acquisitions.

Which of the following describes equity securities, rather than debt securities or derivatives?

They carry more risk than debt securities, but less than derivatives.

They offer a fixed rate of return.

They typically generate the highest returns of the three types of marketable securities.

They are best for hedging against changes in currency exchange rates.

Which of the following is an example of a market risk for a company that manufactures automobiles?

Damage to completed cars being transported to a buyer

A failure in the company's accounts receivable process

A competitor that offers a similar line of cars with comparable quality at lower prices

Being suddenly unable to source a critical component of the automobile

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A commercial financing agreement wherein a company may purchase the leased asset at a discount when the lease ends"

Capital lease

Operating lease

Both

Neither

Place the following steps for developing a credit policy in the correct order of process:

·A: The company decides that it will contact customers by phone if they are late on a payment.

·B: The company decides that it will not require customers to undergo a credit check.

·C: The company decides that it will reward loyal customers with a discount for early payment.

B, C, A

B, A, C

C, B, A

C, A, B

Venture capital bridge financing is appropriate for a company in what stage of development?

Introduction

Growth

Maturity

Decline

Consider the following data from a company's 95-day operating cycle:

·Payable days: 8

·Receivable days: 25

·Inventory days: 70

What is the cash conversion cycle for this company?

103

Which of the following investors would likely prefer a cash dividend over a stock dividend?

Layton prefers when companies let him decide how to benefit from his dividends.

Kylie is a high-income earner and prefers to avoid additional taxes this year.

Harriett is more focused on long-term outcomes than short-term ones when it comes to investing.

Enrique subscribes to the "bird in the hand" theory when it comes to dividends.

Which of the following is a goal of working capital management?

To minimize liquidity and maximize profitability

To balance the cash conversion cycle against maximum revenue

To eliminate the risk of customers defaulting on credit

To make long-term capital investment decisions

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A commercial financing agreement wherein a company may purchase the leased asset at a discount when the lease ends"

Capital lease

Operating lease

Both

Neither

A company invests $40,000 in a project with the following net cash flows:

·Year 1: $3,000

·Year 2: $8,000

·Year 3: $14,000

·Year 4: $19,000

·Year 5: $22,000

·Year 6: $28,000

In what year does payback occur?

Year 3

Year 5

Year 4

Year 6

What is one potential advantage of being a privately-held company?

Risk is spread among a larger pool of investors in a private company.

If a company is private, it is better positioned to pursue acquisitions.

If managers also own the company, they are strongly incentivized to succeed.

A private company has access to less expensive sources of capital than a public company.

A business that has too little working capital can take what action?

Reduce credit to consumers

Increase short-term financing

Increase inventory

Reduce cash on hand

What must be forecasted first in order to prepare the pro forma income statement?

Net income

Sales

Cost of goods sold

Expenses

Thomas is concerned about his company's ability to pay off its short-term debts.

If he wants to know more about his company's liquidity, what should he do?

Calculate his debt to equity ratio

Calculate his total assets

Calculate his net working capital

Calculate his total liabilities

Millie owns stock in an energy company. She has noticed that the market value of her stock does not seem to fall when the company issues no dividends.

The market's response to the company supports the idea of __________.

the dividend effect

dividend irrelevance

information asymmetry

reinvestment bias

An auto manufacturing company is preparing a capital budget and considering four long-term investments. The net present value of each project is as follows:

·Project A: 0.25

·Project B: 0

·Project C: -0.5

·Project D: 1.5

In theory, which two projects should the company pursue?

Projects B and C

Projects A and B

Projects B and D

Projects A and D

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A way for a company to acquire equipment for a relatively short-term period, after which the equipment returns to the owner"

Capital lease

Operating lease

Both

Neither

Company A Company B

Market Value of Equity $700,000 $900,000

Market Value of Debt $300,000 $200,000

Cost of Equity 8% 10%

Cost of Debt 1.5% 3%

Tax Rate 30% 25%

Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 7%?

Neither Company A nor Company B

Both Company A and Company B

Only Company A

Only Company B

You own a small manufacturing business that produces widgets. You have spent $600,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $20 to make and they sell for $65 each, so your variable cost is 30.8% of the overall revenue.

At your current level of operating leverage, how many widgets must you sell to break even?

18,000

13,333

9,231

7,059

Determine whether the following description is true of a capital lease, an operating lease, neither or both.

"A way for a company to acquire equipment for a relatively short-term period, after which the equipment returns to the owner"

Capital lease

Operating lease

Both

Neither

Place the following steps for developing a credit policy in the correct order of process:

·A: The company decides that it will contact customers by phone if they are late on a payment.

·B: The company decides that it will not require customers to undergo a credit check.

·C: The company decides that it will reward loyal customers with a discount for early payment.

B, A, C

C, A, B

B, C, A

C, B, A

Place the following steps for developing a credit policy in the correct order of process:

·A: The company decides that it wants to minimize opportunity costs by having as much cash on hand as possible.

·B: The company decides that it will send out two notices of late payments to customers before pursuing other collection methods.

·C: The company decides that its payment terms will be Net 15.

C, A, B

C, B, A

A, B, C

A, C, B

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