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(TEST) Finance Skills for Managers - D
2024 - 2025. Questions & Correct, Verified
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A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? โ ANS Agency problem due to conflicting interests (Correct! counting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.) A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment using a method that considers the time value of money. Is there more than one way to do this? โ ANS Yes, the analyst could use both the NPV and the IRR. (Correct! Both NPV and IRR take into account the time value of money.) A firm had sales of $100,000 this month. However, the firm received only $90,000 in cash from sales. Why would the firm receive $10, less cash than its monthly sales? โ ANS Because the firm did not make all sales on cash (Correct! Some sales are made on credit rather than cash,
and a portion of credit sales are collected in the following months after the sales.) Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a $600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent $2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in the company's capital budgeting decision? โ ANS 3,000,000 for the offer price of the land (Correct! If you do the project, you will miss the opportunity to sell the land for $3,000,000. This is an example of an opportunity cost.) Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? โ ANS Tighten the credit standards for its customers. (Correct! The credit standards are too loose, so the customers are not paying Firm A as quickly as they are
chosen, the PI is not useful because it does not indicate the dollar value that a project will add to or take away from a firm.) In which type of market would a company issue bonds or stocks for the first time? โ ANS Primary market (Correct! This is the purpose of a primary market.) Suppose you are a manager at a firm. One of your financial analysts places a report on your desk of valuation calculations for some potential investment projects. When you look at the calculations later, you notice that the analyst did not indicate if she used the NPV or IRR method. However, you do notice that the results of the calculations are all percentages. What can you conclude? โ ANS The analyst used the IRR method. (Correct! IRR calculations are represented as percentages because they are rates of return.) The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest rate? - ANS5% (Correct. Real Rate = Nominal Rate - Inflation, so 8% - 3% = 5%.)
UNIT 2 What are the main services offered by financial institutions? โ ANS Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions (Correct! Financial institutions such as banks, insurance companies, and mutual fund companies provide these services.) UNIT 3 What is another name for the cost of capital? โ ANS Discount rate (Correct. Cost of capital, discount rate, required rate, and interest rate are the same thing with different names based on different perspectives.) UNIT 4 Why are ratios useful for analyzing and comparing company performance between firms of different sizes? - ANSThey provide standardization. (Correct! Ratios standardize financial data to make them comparable across firms, even those of distinctly different sizes.) UNIT 5 Jerry wants to begin budgeting his money. What are three principles that he should know before beginning the budgeting process? - ANSKeep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. (Correct! These are three of the six principles of budgeting. The other three are know yourself; develop savings, income, and expense strategies; and use a method that meets your needs and objectives.) UNIT 6 What would an analyst predict for a potential investment with an NPV of zero? - ANSThe project would earn exactly the rate of return
is excluded in the calculation of the quick ratio. (Correct! Since inventory is the least liquid current asset, inventory is not included in the calculation.) What is the disadvantage of debt financing? - ANSDebt financing does not actually achieve an optimal capital structure for a company. (Correct! Debt creates a tax shield, but there should be a mixture of debt and equity in an optimal capital structure.) What is the envelope method of budgeting? - ANSWithdrawing cash at the beginning of the period and then allowing only a certain amount to be available for each category of spending (Correct! The envelope method involves putting a specific portion of your budget in cash in each envelope and only spending this amount during the period.) What is the main objective of personal financial goals? - ANSTo maximize individual utility (Correct! You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.) What is the name for the minimum rate of return that an investor or lender will accept for investments? - ANSRequired rate of return (Correct. This is the rate that investors accept as compensation for risk, opportunity cost, and inflation.) What is the rate at which a firm can grow without issuing new equity? - ANSSustainable growth rate (Correct! The sustainable growth rate is the growth rate that allows a firm to maintain its present financial
ratios without issuing new equity.) What must be determined in order to compare the values of two projects with differently timed cash flows that does not need to be determined for projects with similarly timed cash flows? - ANSOpportunity cost (Correct! Opportunity cost must be determined to analyze two such projects.) What three things should an individual or company be doing so that their budget is effective and so that they are on track to meet their financial goals? - ANSTrack cash flows, monitor cash flows, and revise the budget (Correct! Doing these things helps you to use your money in the most efficient and effective way possible.) What type of ratio is used to consider how a firm is financed and to assess a firm's ability to pay interest and pay back long- term obligations? - ANSFinancing ratios (Correct! Financing ratios consider how a firm is financed.) Which account is a discretionary account? - ANSNotes payable (Correct! Notes payable does not vary with sales, and it is based on management discretion.) Which action reduces the future value of cash flows? - ANSReceive all cash flows later than expected. (Correct. The later the cash flows are received, the lower the future value is.) Which example below is considered a market risk factor?
- ANSAn unexpected change in interest rate occurs. (Correct. This is a factor that affects everyone because it will cause the cost of borrowing
to-book ratio of less than 1? - ANSValue stock (Correct! An M/B ratio of less than 1 is considered a value stock.) Which type of account does not vary with sales and is left to management's discretion? - ANSNon- spontaneous accounts (Correct! Non-spontaneous, or discretionary, accounts do not vary automatically with sales but are left to the discretion of management.) Which type of economic indicator is the consumer price index? - ANSLagging indicator (Correct! CPI usually changes after the economy as a whole changes.) Which type of financial institution is a mutual fund? - ANSInvestment institution (Correct! Investment institutions provide individuals and firms access to financial markets.) Why are activity ratios also called efficiency ratios or asset use efficiency ratios? - ANSBecause they measure how well a company uses its assets to generate sales or cash. Why do fixed assets increase as a lump sum instead of in proportion to sales growth? - ANSA firm must purchase an entire fixed asset rather than just the portion needed to increase production. (Correct!. A factory or a piece of equipment must be purchased as a whole.) Why is it appropriate to calculate the value of a bond in the same way that the present value of an annuity is calculated? - ANSBonds pay a coupon every six months, pay a constant coupon amount, and have a maturity date. (Correct! Bond cash flows are
an annuity, a constant amount paid every period.) Why is it appropriate to calculate the value of a preferred stock in the same way that you would find the present value of a perpetuity? - ANSFor a preferred stock, a fixed amount is paid forever to compensate the investors. (Correct! This is the case for preferred stocks, which are a type of perpetuity.) Why is it important to consider the cost of capital in an ideal evaluation method of capital investment? - ANSBecause cash flows for a project may be uncertain (Correct! This is the reason why you should consider the cost of capital.) Why is it important to consider the time value of money in an ideal evaluation method for capital investment? - ANSBecause the value of a cash flow today is different from the value of a cash flow of the same dollar amount in 10 years (Correct! You cannot directly compare dollar amounts received at different times.) Why is NPV the most reliable method for evaluating investments? - ANSIt considers the time value of money, it tells you the dollar value that the investment will add to the firm, and it takes risk into account. (Correct! These are the main advantages of the NPV, some of which are not included in other methods of valuation, which makes NPV the most reliable.) Why is understanding the definition of finance important in managing personal finances? - ANSIt helps individuals compare the costs
receivable. Also, due to the nature of industry, inventories are illiquid. To make sure that the firm has enough cash holdings for short-term obligations, you decide to create a new ratio of cash to short-term obligations. What is this scenario an example of? - ANSFlexibility (Correct! Ratio analysis is flexible, so you can create a new ratio given the need of the firm.) You just purchased a bond for $1,000 that has a par value of $1,000. What type of bond is this? - ANSA par bond (Correct! The market price of a par bond is the same as the par value. 15)
