Financial Management and Personal Finance, Exams of Finance

Download Financial Management and Personal Finance and more Exams Finance in PDF only on Docsity! D076 OA Question What are the main services offered by financial institutions? A. Soliciting charitable donations and then managing the distribution of these funds B. Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions C. Deciding which assets to invest in to create wealth in the future D. Evaluating sources of funding for a business project, the capital structure of a firm, or actions managers could take to increase the value of the firm Answer B. Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Question What is the main objective of personal financial goals? A. To maximize stock investments B. To maximize individual utility C. To maximize charity donations D. To maximize owner wealth Answer B. To maximize individual utility Question Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? A. Making financing decisions B. Managing working capital C. Deciding on accounting standards D. Making investing decisions Answer A. Making financing decisions Question Why is understanding the definition of finance important in managing personal finances? A. It helps individuals compare the costs and benefits of an action to determine whether to take that action. B. It helps individuals act ethically with regard to finances. C. It helps individuals understand legal issues related to finance. D. It allows individuals to find an investment with the highest return possible. Answer A. It helps individuals compare the costs and benefits of an action to determine whether to take that action. Question In which type of market would a company issue bonds or stocks for the first time? Dealer market Primary market Agency problem due to conflicting interests Answer Agency problem due to conflicting interests Question Which type of interest rate includes interest on interest in addition to interest on the principal? Simple interest Compound interest Yield to maturity Nominal interest rate Answer Compound interest Question What is the rate at which the average price level of particular goods and services in an economy increases over a period of time? Opportunity cost Inflation rate Real rate Nominal rate Answer Inflation rate 1 / 1 Question You signed an apartment contract today. You are going to pay $1,500 at the beginning of each month for the next 12 months, starting today. What type of cash flows is this contract? A perpetuity Uneven cash flows An ordinary annuity An annuity due Answer An annuity due Question What is the term for the return over the entire period that an investor owns a financial security? Real return Required rate of return Expected return Holding period return Answer Holding period return Question What is used to measure total risk? Bond ratings Holding period return Beta Standard deviation Answer Standard deviation Question What is the term for the risk that changes in interest rates will impact the value of a bond? Default risk Systematic risk Interest rate risk Firm-specific risk Answer Interest rate risk Question Which method of ratio analysis looks at a firm's performance over time? Trend analysis Progress measurement Cross-sectional analysis Focus Answer Trend analysis Question Comparing the profitability of firms with different capital structures Comparing the profitability of firms with different capital structures What does an average collection period of 70 tell you? On average, a firm takes 70 days to pay accounts payable. On average, a firm turns over its accounts receivable 70 times a year. On average, a firm takes 70 days to collect accounts receivable. On average, a firm takes 70 days to turn over its inventory. Answer On average, a firm takes 70 days to collect accounts receivable. Question What does high inventory turnover relative to the industry and competitors indicate? The firm has mastered its asset use efficiency to generate sales. The firm does not have the ability to meet short-term obligations. The firm does not hold enough inventory and is making its customers wait longer to receive their purchased goods. The firm's production and operation costs are too high. Answer The firm does not hold enough inventory and is making its customers wait longer to receive their purchased goods. Question What is the difference between return on assets (ROA) and return on equity (ROE)? ROE considers the capital structure of a company, while ROA does not. ROA considers the liquidity of a company, while ROE does not. ROE considers the profitability of a firm, while ROA does not. ROA considers asset use efficiency, while ROE does not. Answer ROE considers the capital structure of a company, while ROA does not. Question MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios, but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve its return on equity, which action would help? Reduce asset efficiency by idling some of its operating plants. Pay off a significant portion of its debt. Perform market-to-book analysis to determine if the trading value of its equity is undervalued. Reduce costs to improve its overall profitability. Answer Reduce costs to improve its overall profitability. Question Jerry wants to begin budgeting his money. What are three principles that he should know before beginning the budgeting process? Track expenses categorically, use the most updated method of budgeting, and eliminate consumer debt. Make eliminating consumer debt a priority, only use the budgeting strategies that are approved by GAAP, and track expenses categorically. Know yourself; transfer long-term debt to short-term debt; and develop savings, expense, and income strategies. Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. Answer Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. Question What are the three things one must determine before making a personal budget? Expenses, interest payments, and savings Tax liabilities, expenses, and income Liabilities, income, and expenses Income, expenses, and savings Answer Income, expenses, and savings Question 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 $10,000 less cash than its monthly sales? Because the firm purchased inventory on credit this month Because the firm paid cash for inventory purchased Because the firm paid down $10,000 on a loan Because the firm did not make all sales on cash Answer Because the firm did not make all sales on cash Answer Notes payable Question What is the rate at which a firm can grow without issuing new equity? Discount rate Internal rate of return Sustainable growth rate Retention rate Answer Sustainable growth rate Question Why do fixed assets increase as a lump sum instead of in proportion to sales growth? A firm needs more fixed assets only when the DFN is negative. A firm purchases fixed assets in proportion to sales. A firm will outsource production until it can use an entire production facility. A firm must purchase an entire fixed asset rather than just the portion needed to increase production. Answer A firm must purchase an entire fixed asset rather than just the portion needed to increase production. Question What would an analyst predict for a potential investment with an NPV of zero? The project would add value to the firm. The project would earn exactly the rate of return required by the firm. The project would take away value from the firm, but only a small amount. The profitability index would also be equal to zero. Answer The project would earn exactly the rate of return required by the firm. Question 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? Yes, the analyst could use both the NPV and the IRR. Yes, the analyst could use the current ratio and could compare cost of capital rates. No, there are no valuation methods that take into account the time value of money. No, the analyst could only use cash budgeting to evaluate the project. Answer Yes, the analyst could use both the NPV and the IRR. Question If two projects are mutually exclusive, which decision-making criterion will help you make the best decision about which project to accept? Initial outlay (IO) Internal rate of return (IRR) Profitability index (PI) Net present value (NPV) Answer Net present value (NPV) Question Why might a firm prefer to raise debt capital through bonds instead of stocks? Bonds have no expiration date. Bonds do not require a firm to give up any ownership. Bonds take advantage of upside potential. Bonds do not require the firm to pay back its loan. Answer Bonds do not require a firm to give up any ownership. 0 / 1 Question Why is it appropriate to calculate the value of a bond in the same way that the present value of an annuity is calculated? Bonds pay a coupon every six months, pay a constant coupon amount, and have a maturity date. The cash flows that come from owning a bond grow at a constant rate every year, and the payments continue forever. Even though bonds have a fixed length, the cash flows differ each year. A bond is a fixed amount paid each period forever to compensate investors. Answer Bonds pay a coupon every six months, pay a constant coupon amount, and have a maturity date. $600,000 for the consulting $3,000,000 for the offer price of the land Answer $3,000,000 for the offer price of the land Question Why is NPV the most reliable method for evaluating investments? It 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. It makes it easy to estimate the cost of capital, it ignores risk, and it is better for tax purposes. It is capable of considering cash flows without taking into account the time value of money, it is useful for comparing two projects of different sizes, and it is an infallible rule for accepting or rejecting capital projects. It does not require you to estimate the cost of capital. Answer It 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. Question 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? The calculations are all wrong. The calculations are incomplete. The analyst used the IRR method. The analyst used the NPV method. Answer The analyst used the IRR method. Question You are considering a project that has a profitability index of 1. What does this mean? The benefit outweighs the cost of the project by the exact same amount as the initial cost. The project has a negative net present value. The project has the internal rate of return equal to the cost of capital. The project has a positive net present value. Answer The project has the internal rate of return equal to the cost of capital. Question You just purchased a bond for $1,000 that has a par value of $1,000. What type of bond is this? A par bond A premium bond A preferred bond A discount bond Answer A par bond Question 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? Preferred stocks pay a coupon every six months, the coupon amount is constant, and the stock has a maturity date. For a preferred stock, a fixed amount is paid forever to compensate the investors. Even though a preferred stock has a fixed length, the cash flows differ each year. The cash flows that come from owning a preferred stock grow at a constant rate every year and continue forever. Answer Preferred stocks pay a coupon every six months, the coupon amount is constant, and the stock has a maturity date. Question Why is it important to consider the time value of money in an ideal evaluation method for capital investment? Because a project's cash flows may be uncertain Because without considering every cash flow of a potential project, you do not know how the project would enhance the firm's value Because the value of a cash flow today is different from the value of a cash flow of the same dollar amount in 10 years Because each project has different amount of risk Answer Because the value of a cash flow today is different from the value of a cash flow of the same dollar amount in 10 years Question Which scenario correctly describes opportunity cost?