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(TEST) Finance Skills for Managers - D076,
Exam Graded A+.
UNIT 2
What are the main services offered by financial institutions? - correct answer 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.) What is the main objective of personal financial goals? - correct answer To maximize individual utility (Correct! You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.) Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? - correct answer Making financing decisions (Correct! Once investment decisions are made, a financial manager considers different possibilities of financing sources for the investments. This may include issuing new stocks and bonds.) Why is understanding the definition of finance important in managing personal finances? - correct answer It helps individuals compare the costs and benefits of an action to determine whether to take that action. (Correct! Any financial decision should make sense in terms of its costs and benefits.) In which type of market would a company issue bonds or stocks for the first time? - correct answer Primary market
(Correct! This is the purpose of a primary market.) Which type of financial institution is a mutual fund? - correct answer Investment institution (Correct! Investment institutions provide individuals and firms access to financial markets.) Which financial institution specializes in managing and administering retirement funds? - correct answer Pension funds (Correct! Pension funds specialize in retirement funds.) Which type of economic indicator is the consumer price index? - correct answer Lagging indicator (Correct! CPI usually changes after the economy as a whole changes.) What does the term ethical refer to? - correct answer The accepted standards of conduct that guide a person's behavior (Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior.) 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? - correct answer Agency problem due to conflicting interests (Correct! Accounting manipulation by management in pursuit of higher stock- related compensation is an example of an agency problem.)
(Correct. This is a factor that affects everyone because it will cause the cost of borrowing and lending to increase. This is a market risk factor.) UNIT 4 Why are ratios useful for analyzing and comparing company performance between firms of different sizes? - correct answer They provide standardization. (Correct! Ratios standardize financial data to make them comparable across firms, even those of distinctly different sizes.) You are the financial manager of a firm. The firm is small and is struggling to collect cash from accounts 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? - correct answer Flexibility (Correct! Ratio analysis is flexible, so you can create a new ratio given the need of the firm.) Why are activity ratios also called efficiency ratios or asset use efficiency ratios? - correct answer Because they measure how well a company uses its assets to generate sales or cash. 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? - correct answer Financing ratios (Correct! Financing ratios consider how a firm is financed.) What does a net margin of 7% indicate? - correct answer For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered. (Correct! Net margin tells us the percentage of sales that will become net income, which is the amount remaining for the equity holders.)
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? - correct answer 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 paying other competitors in the industry. Tightening the credit standards would shorten the average collection period.) What is the difference between the current ratio and the quick ratio? - correct answer Inventory 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.) Which term is used to describe the stock of a firm with market-to-book ratio of less than 1? - correct answer Value stock (Correct! An M/B ratio of less than 1 is considered a value stock.) What does inventory turnover assess? - correct answer The inventory management of a firm (Correct! Inventory turnover tells us how well a firm is managing its inventory.) You are comparing the return on equity of Firm 1 and Firm 2. Both firms have an identical profit margin and asset turnover, but Firm 1 has an overall higher return on equity. What must be true? - correct answer Firm 1 is using a higher proportion of debt to finance its operations. (Correct! The third component of return on equity is the leverage multiplier. Since the firms' profit margins and asset turnovers are the same, it must be the leverage multiplier that is different. Using a higher amount of debt would result in a larger leverage multiplier and an overall higher return on equity.)
(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 are long-term financial forecasts used for? - correct answer Making investment and financing decisions (Correct! Whatever growth a firm anticipates must eventually be financed one way or another. Any investment in capital that exceeds what the firm retains from profit generates a discretionary financing need.) Which type of account does not vary with sales and is left to management's discretion? - correct answer Non-spontaneous accounts (Correct! Non-spontaneous, or discretionary, accounts do not vary automatically with sales but are left to the discretion of management.) Which account is a discretionary account? - correct answer Notes payable (Correct! Notes payable does not vary with sales, and it is based on management discretion.) What is the rate at which a firm can grow without issuing new equity? - correct answer Sustainable 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.) Why do fixed assets increase as a lump sum instead of in proportion to sales growth? - correct answer A 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.)
UNIT 6
What would an analyst predict for a potential investment with an NPV of zero? - correct answer The project would earn exactly the rate of return required by the firm. (Correct! An NPV of zero indicates that a project will neither add nor take away value from a firm.) 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? - correct answer Yes, the analyst could use both the NPV and the IRR. (Correct! Both NPV and IRR take into account the time value of money.) If two projects are mutually exclusive, which decision-making criterion will help you make the best decision about which project to accept? - correct answer Net present value (NPV) (Correct! When only one project can be 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.) Why might a firm prefer to raise debt capital through bonds instead of stocks? - correct answer Bonds do not require a firm to give up any ownership. (Correct! This is attractive to a firm that needs funds for a project but wishes to maintain control.) Why is it appropriate to calculate the value of a bond in the same way that the present value of an annuity is calculated? - correct answer Bonds 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 NPV the most reliable method for evaluating investments? - correct 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. (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.) 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? - correct answer The analyst used the IRR method. (Correct! IRR calculations are represented as percentages because they are rates of return.) You are considering a project that has a profitability index of 1. What does this mean? - correct answer The project has the internal rate of return equal to the cost of capital. (Correct! PI = 1 means that the break-even point is the estimated cost of capital; in other words, the cost of capital and the rate of return should be exactly the same.) You just purchased a bond for $1,000 that has a par value of $1,000. What type of bond is this? - correct answer A par bond (Correct! The market price of a par bond is the same as the par value.
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? - correct answer For 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 time value of money in an ideal evaluation method for capital investment? - correct 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 (Correct! You cannot directly compare dollar amounts received at different times.) Which scenario correctly describes opportunity cost? - correct answer Alexandra decides to spend $50 on some new clothes instead of using that money to pay her electric bill. The opportunity cost is having the electricity turned off. (Correct! Because she bought new clothes, she did not pay her bills.) How does management choose between two projects that are seemingly the same?
- correct answer Management can analyze the different inherent risks that change the cost of capital to the firm. (Correct! Each project will have its own inherent risks.) Which term describes the reduction in sales of a company's own products due to the introduction of another similar product? - correct answer Cost of cannibalization (Correct! The cost of cannibalization is the reduction in sales of a company's own products due to the introduction of another similar product.) Which item is considered a sunk cost? - correct answer The consulting cost spent three months prior to the start of a project (Correct! Since the cost was incurred before the start of the project, this is a sunk cost.)
