d076 Lesson checks

Which statement below is an example of how ratios are used in the field of finance? a) Ratios are helpful only when comparing companies that are the same size and that use the same operational style. b) Ratio analysis is performed based on a strict set of rules governed by generally accepted accounting principles. c) A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. d) A firm's ratios may vary year over year, so they are not helpful for evaluating whether firm goals are met.

c) A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. This is called cross-sectional analysis and is common in financial analysis.

Which component of an interest rate is an indicator of inflation and opportunity cost? a) Purchasing power b) Risk premium c) Risk-free rate d) Growth rate

c) Risk-free rate The risk-free rate describes the rate of return on an investment with no risk, so it just measures inflation and opportunity cost.

Which kind of projects are bondholders interested in? a) Riskier projects that will provide higher returns b) Riskier projects that will increase the value of the company's stocks and their own financial return c) Safe projects with a higher chance of providing sufficient compensation d) Projects that allow the company the most freedom in how it spends money

c) Safe projects with a higher chance of providing sufficient compensation Bondholders provide money for a company for a certain period of time and want companies to pay them back for their investment.

Why are sales not strictly considered to be the same thing as cash receipts? a) Sales include expenses outside of the cash budget. b) Sales are not liquid enough to be considered a form of cash flow. c) Sales include both cash sales and credit sales. d) Sales are not measured on a monthly basis and thus cannot be included in a cash budget.

c) Sales include both cash sales and credit sales. Sales made on credit are not considered a cash receipt until the time period in which they are collected.

What indicates to a firm that a project will increase shareholder wealth? a) The project's cash flows are projected closer to the present. b) The project's cash flows are projected far into the future. c) The NPV is positive. d) The NPV is negative.

c) The NPV is positive. The NPV is an estimate of the dollar amount that would be added to the firm's value as a result of the investment.

What are spontaneous accounts? a) Accounts that are optional to include when creating a financial forecast b) Accounts that do not vary with sales c) Accounts that are left to management's discretion d) Accounts that vary naturally with sales

d) Accounts that vary naturally with sales By definition, when sales increase, the increase must be matched in another account, such as receivables.

How does allocated overhead affect the selection of capital investment projects? a) Overhead represents costs from specific projects, so it tells us the overall impact of a project on a company. b) Accountants are paid to allocate cash flows such as "overhead" to the various projects of a firm. Therefore, these cash flows are added to new projects during analysis. c) These cash flows are not a direct result of a specific project but are a general cost to the firm. d) Overhead is allocated to the various projects of the firm, but never capital investment projects.

c) These cash flows are not a direct result of a specific project but are a general cost to the firm. These cash flows are irrelevant to your analysis.

You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings account for the time being. What would be considered an opportunity cost of putting the money in savings? a) Buying a brand new car worth $25,000 b) The fees you must pay to your bank to hold the $25,000 c) Having access to the money should you have some sort of financial emergency d) Earning interest on the $25,000 you just put in savings

a) Buying a brand new car worth $25,000 Buying a new car would be considered an opportunity cost because it is something you are giving up by keeping the money in your savings account.

Which situation is a real-life example of risk transfer? a) Buying home insurance—risk is transferred from the policyholder to the insurer b) Changing investment vehicles—risk is transferred from one asset to another c) Purchasing U.S. Treasury bonds—risk is transferred from the holder of the bond to the government d) Using your 401(k) investment to buy a home—risk is transferred from the 401(k) fund to the home

a) Buying home insurance—risk is transferred from the policyholder to the insurer This is a correct example of risk transfer.

Which type of risk can be reduced by adding a variety of different assets into a portfolio? a) Firm-specific risk b) Systematic risk c) No risk d) Interest rate risk

a) Firm-specific risk Firm-specific risk can be diversified away.

Which account should be looked at first when examining capacity constraints to determine whether the discretionary financing needed (DFN) can be reduced? a) Fixed assets b) Long-term debt c) Accounts receivable d) Notes payable

a) Fixed assets You can recheck capacity analyses to verify whether the firm really needs as large of an increase in fixed assets as projected in the forecast.

Which question is answered by financial forecasting? a) How much financing will the firm need in the future? b) Which product will produce the most in sales over the next year? c) What is the firm's current market share? d) How will an increase in the firm's tax rate affect the firm's net income?

a) How much financing will the firm need in the future? Finance forecasting helps us determine how much financing is needed in the future given today's business decisions and growth.

How can a company reduce its discretionary financing needed (DFN)? a) Increase the net margin. b) Reduce prices. c) Increase the dividend payout. d) Reduce retention of earnings.

a) Increase the net margin. Increasing net margin increases the projected owners' equity, thus reducing the DFN.

How can having more debt benefit a company? a) Interest expense on debts is paid before taxes are calculated. b) It protects a company from having to buy more assets. c) Debt is never beneficial for a company due to its increasing costs over time. d) It allows management to retain more control over the company.

a) Interest expense on debts is paid before taxes are calculated. This describes the tax shield advantage of debt.

What is an advantage of using the NPV method? a) It calculates the dollar value that would be added to the firm by doing the project. b) It tells the percent return on an investment. c) It does not consider the time value of money. d) It can be used to compare multiple projects when a firm faces capital constraints.

a) It calculates the dollar value that would be added to the firm by doing the project. The NPV is expressed as a dollar amount, and the result of the NPV calculation is exactly how much value would be added to the firm from that specific project.

How does the PI aid in interpretation of the NPV? a) It gives an idea of the return generated by a project. b) It converts the NPV to a percentage, which is easier for management to understand. c) It does not take into account the initial outlay of the project, which makes the NPV easier to understand in comparison. d) It communicates the value that would be lost to the company if it rejected the project.

a) It gives an idea of the return generated by a project. The PI scales different-sized projects so that their returns are comparable.

What is opportunity cost as it relates to the time value of money? a) It is the opportunity you forgo to invest in other options due to the time scope of an investment. b) It is the lowered cost over time of money used for an investment. c) It is the cost at the terminal stage of a project in a TVM model. d) It is the cost of having more investment options than one.

a) It is the opportunity you forgo to invest in other options due to the time scope of an investment. Opportunity cost is the cost that you have to give up for something as a result of investing in something else.

What would an inverted yield curve signal? a) It may indicate an economic downturn. b) It may indicate higher interest rates for long-term bonds. c) It may indicate that inflation is rising at an unsustainable rate. d) It may indicate that the unemployment rate is falling.

a) It may indicate an economic downturn. An inverted yield curve reflects the expectation that the economy will have low or negative growth in the future.

Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects to invest in if it wants to maximize the total amount of value created? a) It should choose the projects with the highest PIs until all capital has been used. b) It should choose the projects with the highest costs until all capital has been used. c) It should choose the projects with the highest NPVs until all capital has been used. d) It should choose the projects with the highest IRRs until all capital has been used.

a) It should choose the projects with the highest PIs until all capital has been used. By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited capital effectively to create the most overall value for the firm.

A firm has paid off its short-term loans more quickly in the past couple of years. What might this trend indicate about the firm's financial ratios? a) Its liquidity ratio is increasing. b) Its profitability ratio is decreasing. c) Its leverage ratio is decreasing. d) Its activity ratio is increasing.

a) Its liquidity ratio is increasing. Liquidity is a measure of the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing.

Which task does a financial manager perform when assessing the costs and benefits of potential projects? a) Making investment decisions b) Implementing financial policies c) Managing working capital d) Making financing decisions

a) Making investment decisions Understanding how benefits weigh up against costs is the first priority before moving forward with financing and managerial decisions.

What kind of market primarily allows institutions to borrow and lend in the short term? a) Money market b) Capital market c) Primary market d) Futures and options markets

a) Money market Assets in money markets are typically highly liquid and intended for use within a year or less.

Which processes help you identify and fix problems in your budget? a) Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. b) Revision allows you to identify problems in your budget, and then tracking allows you to fix those problems immediately so that you can then monitor progress. c) Tracking allows you to identify problems, and then subsequent monitoring allows you to fix those problems. d) When you spend too much in a category of your budget, you have identified a problem, which you can fix by increasing the allotted amount in that category for next month.

a) Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. This assures that the budget is as effective as possible at helping you reach your financial goals.

Which Excel function should you use when you are finding a present value of uneven cash flows to find the PV in one step? a) NPV b) FV c) PV d) IRR

a) NPV You can use one NPV function to find the present value of uneven cash flows.

What is a component of the required rate of return? a) Opportunity cost b) Simple interest c) Hurdle rate d) Compound interest

a) Opportunity cost The required rate of return is composed of opportunity cost, risk, and inflation.

What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? a) Ordinary annuity b) Perpetuity c) Single sum d) Annuity due

a) Ordinary annuity This is the definition of an ordinary annuity. The keys are "at the end of each period," "fixed period," and "equal payments."

What is the compensation for risk given to investors called? a) Risk premium b) Real rate c) Opportunity cost d) Risk-free rate

a) Risk premium Risk premium is the compensation that investors take for the risk they have to bear.

Which type of account changes with sales growth? a) Spontaneous accounts b) Non-spontaneous accounts c) Discretionary accounts d) Fixed assets accounts

a) Spontaneous accounts Spontaneous accounts vary naturally with sales.

Why might a firm prefer to raise debt capital through stocks instead of bonds? a) Stocks do not require the firm to repay the par value to investors. b) Stocks do not require a firm to give up any ownership. c) Stocks do not allow investors to have voting rights. d) Stocks provide a steady stream of income to a firm.

a) Stocks do not require the firm to repay the par value to investors. Stocks are shares of ownership in a firm, so the value of the stock is not required to be returned to investors.

You are evaluating a common stock. What is a key assumption for this evaluation? a) The growth rate is assumed to stay the same forever. b) There is a maturity date. c) Coupon payments are made semiannually. d) Dividends are fixed.

a) The growth rate is assumed to stay the same forever. Common stock valuation uses the constant growth model under the assumption that the growth rate is constant forever.

The word risk is used in many different contexts. How is risk defined in finance? a) The possibility that the realized or actual return will differ from the expected return b) The uncertainty that one project will be more or less successful than another c) The idea that accepting one project will result in forgoing projects with greater returns d) The probability that the expected return will accurately calculate the realized return on a project

a) The possibility that the realized or actual return will differ from the expected return This is an appropriate definition of risk.

Why is the IRR a poor valuation method for a project with unconventional cash flows? a) There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell which IRR is the correct one. b) Projects with unconventional cash flows are only possible to evaluate using trial and error, which is not an acceptable way to calculate the IRR. c) The IRR method can be used only to calculate projects that add value to a firm, and projects with unconventional cash flows never add value to a firm. d) The hurdle rate is always too large for projects with unconventional cash flows.

a) There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell which IRR is the correct one. Projects with unconventional cash flows must be valued using NPV.

Why would a long-term investment require a higher rate of return? a) There is greater risk involved and a higher opportunity cost. b) There is less risk involved and a lower opportunity cost. c) Regulations require a higher rate of return on long-term investments. d) Projects with longer lives always produce a very high return

a) There is greater risk involved and a higher opportunity cost. There is greater risk because you cannot ensure the return of your investment for a longer period of time, and there is a higher opportunity cost because you cannot use that money for other things for a longer period of time.

The firm Betsy's Books has a market-to-book ratio of 1.2. What does this tell you about the firm? a) This firm is expected to grow in the future. b) This firm gets an 20% return on investment. c) This firm gets a 20% return on its assets. d) This firm is about to go out of business.

a) This firm is expected to grow in the future. The market-to-book ratio measures the growth prospects of a company. If the ratio is greater than 1, then the company is expected to grow.

What is the primary goal of the financial manager of a firm? a) To maximize owner wealth b) To maximize the manager's utility c) To minimize the asset holdings of the firm d) To minimize the costs of the firm

a) To maximize owner wealth The financial manager should make decisions based on the primary goal of maximizing owner wealth.

The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? a) To regulate inflation and unemployment b) To increase the size of the Federal Reserve c) To obtain a positive return for its private investors d) To reduce the amount of outstanding debt owed by U.S. citizens

a) To regulate inflation and unemployment Regulating inflation and unemployment is the main objective of the Federal Reserve and central banks, and it is accomplished by adjusting the interest rate.

You are calculating the present value of an annuity due of $5,000 a year for 20 years. The discount rate is 3%. What should be the "type" input variable of the PV function? a) 1 b) 5000 c) 20 d) 0.03

a) 1 The type is the cash flow type in the PV function. 1 = BEGIN, or an indication of an annuity due.

Why is there always a cost for bringing funds into a business? a) A business must compensate investors for the risk that they are taking to invest in the business. b) Investors will only choose the investment vehicle with the highest return. c) A business must compensate investors for the opportunity cost of investing in the business. d) Investors need an investment vehicle to fight inflation.

a) A business must compensate investors for the risk that they are taking to invest in the business. Investors need a reason to part with their money.

Which scenario is an example of an agency problem? a) A manager purchases a company car and allocates it as a company expense. b) The owners of the company offer shares of the company to management. c) An employee takes a potential client to dinner and pays for it using the company credit card. d) The management team works overtime without pay to complete financial reports.

a) A manager purchases a company car and allocates it as a company expense. This is a luxury that does not improve shareholder value and costs the company money.

What characterizes an ethical action? a) An ethical action is based on accepted standards of conduct. b) An ethical action will achieve the best outcome for the decision maker. c) An ethical action is based on what is right or wrong, whether or not society agrees. d) An ethical action takes into account other individuals' values over the decision maker's own.

a) An ethical action is based on accepted standards of conduct. An ethical action conforms to accepted standards of conduct.

What is a depository institution? a) An institution that accepts and pays interest on deposits of money, as well as extends loans b) An institution that has a goal to maximize owner or shareholder wealth c) An institution that is a financial intermediary that raises capital on a contractual basis d) An institution that provides individuals and firms access to financial markets

a) An institution that accepts and pays interest on deposits of money, as well as extends loans This is the definition of a depository institution. Examples include banks and credit unions.

Why is "put $50 in a savings account each month for Christmas gifts" a better budgeting goal than "save money for Christmas gifts"? a) Because it is specific and measurable b) Because $50 is a realistic amount to save each month c) Because it demonstrates a knowledge of the correct steps of cash budgeting d) Because "save money for Christmas gifts" is unattainable

a) Because it is specific and measurable Effective financial goals provide a specific and concrete target to focus on.

Why would a monthly mortgage payment be considered a fixed expense? a) Because the payment is the same amount each month b) Because the bank changes the payment amount each month c) Because the payments vary based upon the cost of the house d) Because you have control over the amount you pay each month

a) Because the payment is the same amount each month A mortgage is a fixed expense, meaning that the payment amount is the same each month. Knowing which of your expenses are the same from month to month will help you budget more accurately.

The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing in comparison to other similar firms. What is this process called? a) Benchmarking b) Maximization c) Auditing d) Equity valuation

a) Benchmarking Benchmarking allows management to see how firms differ from one another and evaluate their performance relative to each other.

How far into the future do cash budgets usually forecast? a) Between one month and one year b) Between five and ten years c) Between one and three years d) Between one and two weeks

a) Between one month and one year Cash budgets are not useful if they forecast less than one month, and it is not necessary for cash budgets to extend beyond one year in the future.

Why would a company or individual want to retain risk? a) Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative. b) Individuals retain risk because they are unable to transfer that risk to other entities. c) Both companies and individuals retain risk when they cannot afford the cost to reduce the risk. d) Companies never retain risk because they are already prone to so much market risk.

a) Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative. This is the correct reasoning behind risk retention.

When evaluating a company's performance, what can variances on a company's cash budget indicate? a) Variances show that certain managers or divisions are not meeting targets. b) Variances are expected and should never pose a concern for management. c) Variances are not useful for performance evaluation of certain managers or divisions. d) Variances show that expenses were necessarily greater than income for the budget horizon.

a) Variances show that certain managers or divisions are not meeting targets. Cash budgets provide a basis for performance evaluation, and significant variance from predicted income, saving, and expense predictions indicates that management has not accurately assessed company operations.

In what situation might the software method of tracking be preferable to the spreadsheet method of tracking? a) When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases b) When a person has a lot of free time and likes to record each cash flow by hand c) When a person prefers to use cash to make purchases and is very good about remembering to track cash flows d) When a person needs cash flow information for tax purposes

a) When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases The software method is convenient for busy people who do not want to use cash or record cash flows by hand.

Why is built-in inflation linked to adaptive expectations? a) Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. b) Regulations set by the authorities build an expectation of price increases. c) Increased demand for goods and services becomes unbalanced with the supply of goods and services. d) Expectations of accidents or high demand cause expectations of price increases.

a) Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. When the prices of goods and services go up, employees expect and even demand higher wages to maintain their living standard, which will lead to further increases in prices.

Which item is an example of a cash receipt in a personal budget? a) A purchase of $53 for groceries and toiletries for the week b) A graduation gift of $100 from your grandmother c) A ski pass worth $65 that your roommate gives you in exchange for borrowing your car d) A payment of $125 for an annual doctor's visit

b) A graduation gift of $100 from your grandmother Since this is money, or income, coming into your cash budget, it represents a cash receipt.

What is an expected return? a) The cost to a firm to use an investor's capital b) A hypothesized estimate of future returns under different scenarios based on expectational data c) The annual interest rate that is charged for borrowing money d) A return over the entire period that an investor owns a financial security

b) A hypothesized estimate of future returns under different scenarios based on expectational data This choice is the definition of expected return.

How is the interest rate expressed? a) As a ratio b) As a percentage c) As a fractional probability d) As a dollar amount

b) As a percentage Interest is the percentage of the principal that a lender receives or that a borrower pays to use the money.

Why does the time value of money play an important role in financial decision-making? a) Because the time value of money helps you estimate cash flows received at different times so that you can sum up all the benefits and costs b) Because the benefits of investments received at different times are comparable only when you consider the time value of money c) Because you do not need to consider inflation, opportunity cost, or risk for investments when using time value of money d) Because the time value of money helps you estimate the cost of capital of any project

b) Because the benefits of investments received at different times are comparable only when you consider the time value of money With the time value of money, you can find today's value of future cash flows to compare the costs and benefits of different investments.

What is the name for the process of evaluating and planning for purchases of long-term assets? a) The constant growth model b) Capital budgeting c) The time value of money d) The perpetuity model

b) Capital budgeting Capital budgeting is the process of evaluating and planning for purchases of long-term assets.

In what way is preferred stock different from bonds? a) Preferred stockholders do not have voting rights, but bondholders do. b) Companies are allowed to skip payments to preferred stockholders but not to bondholders. c) Companies must pay preferred stockholders but not bondholders before common stockholders. d) Preferred stock payments are fixed, but bond payments are not.

b) Companies are allowed to skip payments to preferred stockholders but not to bondholders. If companies skipped bond payments, they would go into default. Companies can skip payments for preferred stock. However, by skipping these payments, companies are not able to pay common stockholders and must pay dividends in arrears at some point.

Which action would help you make your budget more efficient? a) Every month, increase the allotted amounts for each category of your budget. b) Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. c) Create only two categories for expenses: necessary and unnecessary. d) Reduce your payments toward savings so you have enough for monthly expenses.

b) Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. This would allow you to keep your budget updated and effective so you can make the best use of your money.

What role does financial forecasting play in the future success and growth of a firm? a) Financial forecasts are much less important than cash budgets because cash budgeting is the only essential tool a firm needs to attain long-term success. b) Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. c) Financial forecasts are only moderately useful because predicting the future is impossible. d) Financial forecasting looks backward to provide historical data that informs future operations.

b) Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. While understanding the past is key to moving forward, accounting for any proposals in your forecasts highlights where funding may be needed or where you might actually have more room to spend.

Which example demonstrates a financing decision in a firm? a) Whether a company should use a third-party public affairs firm to promote its new product b) How a company will fund its assets and operations—namely, what proportions of debt and equity the business will use c) How a company will increase its sales for next year by attracting new customers d) Whether a company should hire executive leadership from outside the company or promote managers from within

b) How a company will fund its assets and operations—namely, what proportions of debt and equity the business will use This correctly characterizes a finance decision.

What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? a) Compound interest b) Interest rate c) Simple interest d) Inflation rate

b) Interest rate This is the definition of interest rate.

What is the main purpose of charging interest? a) It allows financial analysts to accurately calculate the time value of money when evaluating a project. b) It allows borrowers to pay to use the assets of another entity to accomplish their own goals. c) It funds private banking institutions. d) It is what makes trading assets such as vehicles and land possible.

b) It allows borrowers to pay to use the assets of another entity to accomplish their own goals. Because the funds do not belong to borrowers, they must pay to use them. This payment is the interest rate.

How does financial forecasting help with financial decision-making? a) It helps managers understand what key assumptions to make for the future. b) It helps decision makers understand the impacts of today's actions on the future performance of the firm. c) It helps decision makers see a detailed map of the future performance of the firm. d) It helps managers analyze how the firm has been performing over the past several years.

b) It helps decision makers understand the impacts of today's actions on the future performance of the firm. This is the purpose of financial forecasting.

What is a disadvantage of using the NPV method? a) It is not an effective way to compare projects with different time spans. b) It is not an effective way to compare projects of different sizes. c) It often underestimates cash flows. d) It does not consider the time value of money.

b) It is not an effective way to compare projects of different sizes. NPV should not be used to compare projects of different sizes.

What are the effects of attempting to maximize shareholder value for a business in an unethical way? a) It often gives the business an opportunity to improve its branding and reputation. b) It often leads to decreased shareholder value for the business. c) It often decreases vulnerability to long and expensive litigations. d) It often leads to employing more workers and boosting the economy.

b) It often leads to decreased shareholder value for the business. Unethical behavior can lead to very costly results.

Which type of error would result in a set repercussion or penalty given by the government? a) Spiritual b) Legal c) Moral d) Ethical

b) Legal A legal error would result in a predetermined penalty by the government.

What makes market risk different from firm-specific risk? a) Market risk is a factor in the risk-return relationship, and firm-specific risk is not. b) Market risk cannot be diversified away, and firm-specific risk can. c) Market risk is caused by unexpected changes, and firm-specific risk is caused by expected changes. d) Market risk depends on internal systems within a company, and firm-specific risk is independent of internal systems.

b) Market risk cannot be diversified away, and firm-specific risk can. Market risk is inherent in the economy as a whole and therefore cannot be diversified away.

Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? a) Standard b) Moral c) Ethical d) Legal

b) Moral Moral reflects one's beliefs about right and wrong, good and bad, or just and unjust.

Which type of interest rate is the rate at which invested money grows for a certain period time? a) Inflation rate b) Nominal rate c) Risk-free rate d) Real rate

b) Nominal rate The nominal rate is the rate at which invested money grows for a certain period of time and is the interest rate most often used in your daily life.

You are calculating the lump sum of money needed now in order to withdraw $10,000 a year over the next 5 years from an account that earns a 3% interest rate. Which Excel function should you use? a) RATE function b) PV function c) NPER function d) FV function

b) PV function Since you are looking for a relative past value of future cash flows, you should use the PV function in Excel.

What happens to prices in a market in which there is inflation? a) Prices fall. b) Prices rise. c) Prices fluctuate from day to day, sometimes increasing and sometimes decreasing. d) Prices remain the same.

b) Prices rise. Prices rise because of increase in demand, increase in cost of goods, and adaptive expectations.

Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? a) Insurance b) Private equity c) Corporate finance d) Financial planning

b) Private equity Private equity deals with investments in firms that are privately held and whose ownership is not yet bought or sold on any public stock exchange.

Which items are considered cash disbursements for a business? a) Cash sales and accounts receivable b) Raw materials, rent, administrative expenses, interest, and selling expenses c) Dividends, investments, cash sales, and tax liabilities d) Rent, accounts receivable, accounts payable, and raw materials

b) Raw materials, rent, administrative expenses, interest, and selling expenses These are common products or services that a firm pays cash for during a specified period in order to generate sales.

How is risk separation different from diversification? a) Risk separation involves dispersing resources geographically in one location instead of across several locations. b) Risk separation involves dispersing assets geographically instead of concentrating them in one location. c) Risk separation involves dispersing resources across different investment vehicles within the same asset class. d) Risk separation involves dispersing assets across economies instead of focusing them in one economy

b) Risk separation involves dispersing assets geographically instead of concentrating them in one location. This is the main difference between the two techniques.

What is one way that a firm can improve its return on equity? a) Increasing the number of trainings it gives management b) Successfully cutting production costs to boost net margin c) Hiring more employees for the accounting department to implement a multiple check system d) Improving loan relations by ensuring that it meets debt covenants

b) Successfully cutting production costs to boost net margin Increasing net margin increases the ROE.

Why is the timing of cash flows an important characteristic of capital investment? a) Companies are wary of inflation risks due to timing of cash flows. b) Timing of cash flows is related to the opportunity cost associated with those cash flows. c) Timing of cash flows is related to the sunk costs associated with those cash flows. d) Companies need to know if they will have enough cash inflows to pay off their debt expenses.

b) Timing of cash flows is related to the opportunity cost associated with those cash flows. The cash flows of an investment need to be compared to the cash flows of other projects.

What is the primary role of financial institutions? a) To provide liquidity when trading financial assets b) To conduct financial transactions such as investments, loans, and deposits c) To deal with financing, capital structuring, and investment decisions d) To provide financial information to the stakeholders of a business

b) To conduct financial transactions such as investments, loans, and deposits Financial institutions conduct transactions to circulate money.

A company called Bobby's Books is considering purchasing a new bookbinding machine. The company calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase the bookbinding machine? a) No, because the old bookbinding machine still works. b) Yes, because the IRR exceeds the cost of capital. c) No, because the hurdle rate is lower than the IRR. d) Yes, because newer models of equipment are always profitable investments.

b) Yes, because the IRR exceeds the cost of capital. When the IRR of a project is greater than the hurdle rate (the required rate of return, or cost of capital), it indicates that the company should accept the project.

How can agency costs be mitigated? a) Releasing managers who do not attempt to maximize immediate shareholder value b) Separating owners from management so their interests do not conflict c) Aligning managers' interests with shareholders' interests d) Creating a corporate hierarchy of several managers

c) Aligning managers' interests with shareholders' interests This is most commonly done by compensating management with shares of ownership in the company.

Which phrase accurately depicts what interest rate risk is? a) An example of market risk because all bonds will react in the same direction to a change in rates b) An example of firm-specific risk because the value of a bond is determined by its maturity and coupon rate c) An example of market risk where the value of a bond is affected by changes in interest rates d) An example of firm-specific risk where the value of a bond is affected by changes in interest rates

c) An example of market risk where the value of a bond is affected by changes in interest rates This is the correct definition of interest rate risk.

Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? a) Bondholders are primarily interested in maintaining the company's current financial status. b) Bondholders are primarily interested in maximizing shareholder wealth. c) Bondholders are primarily interested in making sure they will be paid back. d) Bondholders are primarily interested in the company paying more dividends.

c) Bondholders are primarily interested in making sure they will be paid back. If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which means that the bondholders may put themselves at a higher risk of not receiving their loan back.

In 1980, the inflation rate was 5% and a particular investment gave a return of 15%. In 2010, the inflation rate was 5% and the same investment gave a return of 12%. In which year did stockholders gain greater purchasing power and why? a) 2010 because the inflation was greater than in 1980 b) 2010 because the nominal rate was higher than in 1980 c) 1980 because the return was higher than in 2010 d) 1980 because the real rate was higher than in 2010

d) 1980 because the real rate was higher than in 2010 In order to compare purchasing power, you have to find the real rates. The real rate is nominal rate minus inflation. Therefore, the investment gave higher purchasing power in 1980 than in 2010.

Which item represents an example of a cash disbursement a business might have this month? a) Interest earned on bank deposits held by the firm. b) A collection of accounts receivable on sales made last month c) A purchase of inventory on credit that will be paid off next month d) A rent check paid and cashed for the warehouse the company uses

d) A rent check paid and cashed for the warehouse the company uses Since this expense is being paid this month and the cash is being withdrawn from the company's account, this represents an example of a cash disbursement.

When can the discretionary financing needed (DFN) be determined? a) After total revenue, alone, is projected b) After total financing need is determined c) After total revenue and expenses are projected d) After pro-forma financial statements are forecasted using the percent of sales method

d) After pro-forma financial statements are forecasted using the percent of sales method Once all the financial statements are projected according to a given set of assumptions, you can determine the financing required to fund the predicted growth in sales.

What are the purposes of financial markets? a) To maintain fair, orderly, and efficient markets b) To willingly take risk and capture returns c) To affect the distribution of income for investors d) To provide liquidity and determine prices

d) To provide liquidity and determine prices The purposes of financial markets are to provide liquidity and to determine prices.

Why might a firm seek capital investment? a) To fulfill expected dividend payments b) To pay off bondholders c) To pay short-term loans d) To purchase long-term assets for future growth

d) To purchase long-term assets for future growth Firms need funding for projects that will increase shareholder wealth in the future.

What is the goal of financial forecasting? a) To provide a detailed map of a firm's future b) To project sales so investors can adjust stock prices c) To project net income and dividends for a firm d) To understand the implications of today's decisions on tomorrow's performance

d) To understand the implications of today's decisions on tomorrow's performance The goal of financial forecasting is to see the big picture of how financial decisions will affect future performance.

Which statement correctly contextualizes what a return is? a) A return is the amount of time it will take for an investor to recuperate their initial investment. b) A return is the gain that one makes on an investment over a period of time. c) A return is the gain or loss on an investment over some period of time. d) A return is probably one of the simplest terms in finance but is used only as part of data analytics.

c) A return is the gain or loss on an investment over some period of time. This is the correct definition of a return.

An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this? a) A premium bond b) A discount bond c) A par bond d) A preferred bond

b) A discount bond When the market price is less than the par price of a bond, you know that the YTM is currently higher than the coupon rate of that particular bond, so it is being sold at a discount.

Which NPV value indicates that the IRR has been reached? a) -$100.00 b) $0.00 c) $15.00 d) $99.99

b) $0.00 The IRR is the rate of return that makes the NPV of a project equal to zero.

You are considering purchasing a house for $250,000. You have two options to finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option requires you to pay more in total interest? a) A 20-year mortgage b) A 30-year mortgage c) Both are the same d) Cannot be determined

b) A 30-year mortgage Even though the interest rate is the same, the longer the loan is, the more interest you pay for the mortgage.

What are the three main uses of cash budgets? a) Cash budgets allow periodic performance evaluation, inform investors of changes in net income, and allow businesses to gain access to credit. b) Cash budgets help companies know how much to invest in capital, aid in expense tracking, and predict when additional financing is needed. c) Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. d) Cash budgets show lenders how effective the management of a business is, allow for corrective action when needed, and increase a firm's degree of leverage.

c) Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. A good cash budget is used in these ways to help a firm operate more effectively and efficiently.

What three things should be included in a cash budget for a business? a) Sales, expenses, and borrowing b) Income, expenses, and savings c) Cash receipts, cash disbursements, and borrowing d) Cash receipts, cash disbursements, and savings

c) Cash receipts, cash disbursements, and borrowing All three of these things affect cash flows in a business and should be included in a cash budget.

If a company expects sales to grow by 10% next year, which account might also increase by 10%? a) General business insurance b) Headquarters utilities c) Cost of goods sold d) Training budget for senior employees

c) Cost of goods sold Cost of goods sold is a spontaneous account, so if sales go up, you would expect the cost of goods sold to increase by a similar percentage. Otherwise, the company would not be able to sell products.

Which actions, taken together, will certainly increase a firm's ROE? a) Decreasing equity financing and decreasing return on assets b) Increasing net margin and decreasing debt financing c) Decreasing equity financing and increasing net margin d) Increasing total asset turnover and decreasing debt financing

c) Decreasing equity financing and increasing net margin Decreasing equity financing increases the leverage multiplier, therefore increasing ROE, and increasing net margin also increases ROE.

What should be the main question a firm asks when considering any investment decision? a) Will this investment help the company reduce costs? b) What is the best investment in the stock market? c) Do the benefits of this investment outweigh the costs? d) Will this investment add value to the firm?

c) Do the benefits of this investment outweigh the costs? For any investment, you should expect to receive a benefit worth at least as much as the initial cost.

What is the primary difference between finance and accounting? a) Accounting involves investing and forecasting, while finance summarizes a company's financial information. b) Accounting focuses on the future, while finance is generally backward-looking. c) Finance focuses on the future, while accounting is generally backward-looking. d) Finance provides financial data to decision makers, and accounting involves making decisions using that data

c) Finance focuses on the future, while accounting is generally backward-looking. Finance is the management and allocation of capital with the objectives of investing, forecasting, budgeting, saving, lending, and borrowing.

You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making? a) Investing b) Assessing c) Financing d) Analyzing data

c) Financing Part of the personal finance process is figuring out how to finance your goals in a way that is within your means.

You are conducting financial forecasting for your firm given the projected sales. What are you doing if you are estimating changes in the balance sheet based on the predicted change in sales? a) Calculating retained earnings b) Determining total financing need c) Forecasting spontaneous accounts d) Projecting discretionary accounts

c) Forecasting spontaneous accounts Spontaneous accounts change in proportion to sales growth.

What does the sales capacity equation tell you? a) How much the firm can grow without issuing new equity b) The limit for a firm's sales growth c) How much room a firm has to grow without additional investment in fixed assets d) The minimum amount of fixed assets required to support current sales

c) How much room a firm has to grow without additional investment in fixed assets By using the ratio of actual sales to percent of capacity, you can determine how much sales growth the firm can support without needing to invest in further fixed assets.

How does cannibalization factor into capital investment decisions? a) If your company is planning on launching a product, and that product is going to harm the sales of another of your products, it is better not to compete with yourself and lose market shares. b) If your company is planning on launching a product, and that product is going to diminish some of the company's cash flows generated from another product, it is better not to harm your products' reputations. c) If your company is planning on launching a product, and that product is going to steal some of the sales of another of the company's products, that loss of sales could be an incidental cost or revenue caused by the new product. d) If your company is planning on launching a product, and that product is going to steal some of the sales of another company's products, that could be an incidental cost or revenue caused by the new product.

c) If your company is planning on launching a product, and that product is going to steal some of the sales of another of the company's products, that loss of sales could be an incidental cost or revenue caused by the new product. This is the correct definition of cannibalization.

Five years ago, Ahmed decided he was going to save up to purchase a car with cash. The car he wants is priced at $15,000. He saved $245 a month in an account that gave him enough interest to have $15,000 in five years. Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider? a) Opportunity cost b) Risk c) Inflation d) Interest rate

c) Inflation The price of the car simply went up by $1,562 due to inflation.

A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? a) Central bank b) Private equity institution c) Investment bank d) Pension fund

c) Investment bank Investment banks facilitate complex financial deals, like mergers.

Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? a) Financial institutions b) Accounting c) Investments d) Capital structure

c) Investments Investments is the area of finance that seeks to create wealth in the future by deciding where to allocate money.

How can the DuPont framework help a company assess its return on equity? a) It provides a cross-sectional analysis of the industry for the firm to be able to compare its return on equity to that of its competitors. b) It breaks the cash flow of a company into the operating, investing, and financing aspects of the firm to help identify how each contribute to the firm's profitability. c) It allows the company to determine how its abilities to generate profits, manage assets, and use financing contribute to the return on equity. d) It compares alternative ways of financing the firm with debt so the company can determine which will provide the highest return on equity.

c) It allows the company to determine how its abilities to generate profits, manage assets, and use financing contribute to the return on equity. The DuPont framework breaks the return on equity into each of these components using the profit margin, total asset turnover, and leverage ratio.

Unemployment rate is which type of economic indicator? a) Concurrent b) Leading c) Lagging d) Coincident

c) Lagging Lagging indicators change after the economy changes.

Which type of ratio is a current ratio? a) Solvency b) Market c) Liquidity d) Activity

c) Liquidity A current ratio is a liquidity ratio because it assesses whether a firm can meet short-term obligations.

What type of ratio is used to assess a firm's ability to meet short-term obligations without raising external capital? a) Activity ratios b) Profitability ratios c) Liquidity ratios d) Market ratios

c) Liquidity ratios Liquidity ratios measure a firm's ability to meet short-term obligations without raising external capital.

What is the purpose of monitoring your cash flows? a) Monitoring is used to identify the degree to which a business is leveraged so that the business can determine when it will be most profitable to repay outstanding loans. b) Monitoring is the process by which firms prove to lenders that they have sufficient cash flow to pay back a short-term loan. c) Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. d) Monitoring allows you to implement changes to your budget gradually in such a way that the changes go smoothly and efficiently.

c) Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. If a business did not monitor its budget, then tracking cash flows would be useless, and the business would not know if it was on track to reach its goals.

Which of these measures is a component of return on equity? a) Current ratio b) Operating margin c) Net margin d) Fixed asset turnover

c) Net margin Net margin, total asset turnover, and leverage multiplier are the components of return on equity.

Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the goal of the firm, which capital budgeting method should Talia use? a) Time value of money b) Internal rate of return (IRR) c) Net present value (NPV) d) Profitability index (PI)

c) Net present value (NPV) When you compare mutually exclusive projects, you should look at how much value is added by each project, because you can do only one of them. Therefore, you should use the NPV method to choose a project.

Should a firm accept a project that has a PI of 0.8? Why? a) No, because the PI is supposed to be represented as a dollar amount. b) Yes, because the PI would generate cash flows that are 80% more than the initial investment. c) No, because the project would be generating cash inflows that are 20% short of the initial investment. d) Yes, because the PI is less than the cost of capital.

c) No, because the project would be generating cash inflows that are 20% short of the initial investment. As a rule, firms should accept only projects that have a PI greater than 1.

A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? a) Futures and options market b) Dealer market c) Primary market d) Secondary market

c) Primary market When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market.

How might calculating financial ratios help shareholders? a) Ratios help shareholders audit firms to make sure they are in accordance with GAAP standards. b) Ratios can be used to know what exactly is happening in a firm by answering questions about the firm. c) Ratios can be used to determine whether a firm is maximizing shareholder wealth. d) Ratios allow shareholders to participate in management decisions.

c) Ratios can be used to determine whether a firm is maximizing shareholder wealth. Ratios are used to evaluate managerial actions so shareholders can determine how effectively and profitably managers are using their invested capital.

BigDog and SmallDog are two companies that have an identical return on equity. One difference between the two companies is that BigDog has 40% of assets financed by debt while SmallDog has 100% of assets financed by equity. What can you conclude about BigDog and SmallDog? a) SmallDog has a smaller ROA than BigDog. b) SmallDog has a smaller ROE than BigDog. c) SmallDog has a higher ROA than BigDog. d) SmallDog has a higher ROE than BigDog.

c) SmallDog has a higher ROA than BigDog. Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of BigDog. Since both companies have the same ROE, SmallDog must have a higher ROA.

How do insurance companies pay policyholders when a claim is made? a) They withdraw funds from policyholders' premium accounts. b) They withdraw funds from their corporate savings account. c) They use returns from stocks and bonds. d) They raise premiums for everyone who filed a claim during the year.

c) They use returns from stocks and bonds. Insurance companies invest the money that they earn from premiums into stocks and bonds, and then the returns are used to fill claims.

What is the name for the concept that a dollar today is worth more than a dollar in the future? a) Ordinary annuity b) Cost of capital c) Time value of money d) Perpetuity

c) Time value of money The time value of money is the concept that today's dollar is worth more than a dollar in the future.

What is one of the fundamental purposes of financial forecasting? a) To ensure that the future period's sales and costs will not exceed historical numbers b) To understand the link between asset requirements and industry c) To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm d) To create accurate financial reports that summarize the company's financial performance for the previous period

c) To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm A solid financial model will allow you to see how changes in cost structures or sales growth will impact the firm's future cash flows, financing needs, and cash budgeting.

What is the primary aim of personal finance goals? a) To maximize shareholders' utility by increasing a firm's value b) To create more wealth and returns on investments c) To maximize satisfaction from products purchased and services obtained d) To increase consumption of goods and services

c) To maximize satisfaction from products purchased and services obtained The objective of personal financial goals is to maximize one's utility.

What is the main reason why it is important to track and record cash flows? a) Tracking cash flows is the main process by which a person can calculate the return they are receiving on their investments. b) Tracking cash flows is important because it is impossible to refinance a loan without tracking your income and expenses. c) Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed. d) Tracking your cash flows allows you to increase your annual income by knowing your previous income.

c) Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed. This is the first step in the budgeting process, and it is necessary in order to have an accurate budget going forward.

What do leverage ratios describe? a) What return shareholders will earn on their investment in a firm b) How easily a firm can convert assets into cash c) What proportions of equity and debt a firm uses to finance its assets d) How efficiently a firm is using its assets

c) What proportions of equity and debt a firm uses to finance its assets This information gives insight into the financial structure of a firm.

Why is it important to consider all relevant cash flows in an ideal evaluation method for capital investment? a) A project's cash flows may be uncertain. b) The value of a cash flow today is different from the values of a cash flow of the same dollar amount in 10 years. c) Without considering every cash flow of a potential project, you do not know how the project will enhance the value of a firm. d) If you can receive money earlier, you can reinvest the cash into different projects earlier.

c) Without considering every cash flow of a potential project, you do not know how the project will enhance the value of a firm. You need to include all the cash flows coming from a potential project to understand how much value they will add to the firm.

Why does an increased demand for goods and services cause inflation? a) An increase in demand causes a decrease in prices because suppliers are not willing to meet the increased demand. b) An increase in demand results in better-quality goods, which means that they will be more expensive. c) An increase in demand causes people to want less goods and services because of increased competition, which will result in a decrease in market price. d) An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply.

d) An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. An increase in demand results in an increase in prices, which is the definition of inflation.

What are incremental cash flows? a) The sum of all positive and negative cash flows that create an incremental increase or decrease in revenue b) The positive cash flows of a project discounted back to their present value c) All cash flows that the firm has that may be affected by accepting a new project d) Any additional cash flows, whether in or out of the firm, that are created as a result of accepting a project Correct! This is the correct definition of incremental cash flows.

d) Any additional cash flows, whether in or out of the firm, that are created as a result of accepting a project This is the correct definition of incremental cash flows.

Why are several different types of ratios used to analyze a firm? a) Because certain types of ratios become obsolete as a firm innovates b) Because other ratios must be calculated before the main ratio can be calculated c) Because ratios are sometimes inaccurate, and firms have a greater chance of calculating an accurate ratio if they calculate multiple ratios d) Because different types of ratios are needed to get information about different parts of a firm

d) Because different types of ratios are needed to get information about different parts of a firm Using only one type of ratio in a full financial analysis of a firm would not tell you very much information about the firm. It is through the calculation of many ratios that an analyst will be able to see the bigger picture of the firm.

Why are ratios considered flexible? a) Because they are based on estimates and thus do not have to be exact b) Because they do not require historical financial data in order to analyze a firm c) Because there are five ratios that must always be calculated and then reported on public financial statements d) Because they are not regulated and can be changed or invented according to a firm's needs

d) Because they are not regulated and can be changed or invented according to a firm's needs Because financial ratios are an internal management tool, they are not subject to external rules and regulations.

What tool can you use to understand your overall personal cash flows? a) Setting financial goals b) Investing c) Saving d) Budgeting

d) Budgeting Budgeting helps you to understand your income and expenses and to analyze your cash flows.

Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? a) Financial institutions b) Real estate c) Investments d) Business finance

d) Business finance Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm.

Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? a) Credit union b) Mutual fund c) Commercial bank d) Central bank

d) Central bank Central banks control the supply of money in the economy.

What is the third step in finding a solution to an ethical dilemma? a) Consider alternative courses of action b) Identify and define the problem c) Move forward with the course of action you have chosen d) Consider all stakeholders involved

d) Consider all stakeholders involved First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved.

Which action increases a company's sustainable growth rate (SGR)? a) Decreasing asset use efficiency b) Decreasing the leverage the company uses c) Decreasing profitability d) Decreasing dividend payout

d) Decreasing dividend payout Decreasing dividend payout increases earnings retention and thus increases the SGR.

What is the correct order of the three steps necessary to create a cash budget? a) Evaluate income, create the cash budget, estimate cash disbursements b) Create the cash budget, determine cash receipts, estimate cash disbursements c) Estimate cash disbursements, predict expenses, create the cash budget d) Determine cash receipts, estimate cash disbursements, create the cash budget

d) Determine cash receipts, estimate cash disbursements, create the cash budget Doing these three things in this order can help you understand your business, understand the timing of cash flows, and keep track of borrowing requirements.

Which statement accurately describes firm-specific risk? a) Firm-specific risk can be defined as risk that results from factors at a certain point in the economy. b) Firm-specific risk can be defined as risk that can be diversified away by choosing the appropriate industry to invest in. c) Firm-specific risk is the risk associated with problems that companies may face because of changes in interest rates, changes in cash flows due to tax changes, and business cycle changes. d) Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors.

d) Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors. This is the appropriate definition of firm-specific risk.

If you invest $10,000 today and then $5,000 each year for the next 5 years into an investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years. What does $39,248.14 represent? a) Annuity b) Perpetuity c) Present value d) Future value

d) Future value Future value measures the worth of relative past cash flows. The $39,248.14 is relative future to other cash flows.

Which capital investment evaluation method is presented as a ratio? a) Quick ratio b) Net present value (NPV) c) Internal rate of return (IRR) d) Profitability index (PI)

d) Profitability index (PI) The PI is the ratio of discounted benefits to discounted costs.

How are non-incremental cash flows different from incidental cash flows? a) All non-incremental cash flows should be included. It is unclear if a company will incur a cost regardless of whether it adopts a specific project, so that cost should be counted as a cost of the project. b) All incidental cash flows should be excluded. If a company will incur a cost regardless of whether it adopts a specific project, the cost should not be counted as a cost of the project. c) Incidental cash flows are indirect cash flows that are not explicitly revenues or costs. Therefore, they must not be included in the analysis. d) Incidental cash flows are indirect cash flows that are not explicitly revenues or costs. Nevertheless, they must be included in the analysis.

d) Incidental cash flows are indirect cash flows that are not explicitly revenues or costs. Nevertheless, they must be included in the analysis. Incidental cash flows are included in analysis and non-incremental cash flows are not.

Which action increases the return on equity of a firm if all else remains constant? a) Decreasing the total asset turnover b) Increasing equity financing c) Decreasing profitability d) Increasing debt financing

d) Increasing debt financing Increasing debt financing increases the leverage multiplier, which means that the ROE increases.

Which action decreases the discretionary financing needed (DFN)? a) Decreasing the retention ratio b) Increasing the payback ratio c) Decreasing the net margin d) Increasing the plowback ratio

d) Increasing the plowback ratio Increasing the plowback ratio increases projected owners' equity and thus decreases DFN.

Suppose Alice is trying to explain to her friend, who knows nothing about the time value of money, why she should invest in Alice's new company. Which method of valuation should Alice use to convince her friend to invest? a) Debt-to-equity ratio b) Cash budgeting c) Net present value (NPV) d) Internal rate of return (IRR)

d) Internal rate of return (IRR) The IRR is easy to interpret, which makes it ideal for communicating the potential of an investment decision.

How can a firm grow its fixed assets if it is expecting growth but has reached capacity with its fixed assets? a) Increase the net margin. b) Use the percent of sales method to forecast fixed assets. c) Continue to invest in capital through small increments over time. d) Invest a substantial amount of money at one time to increase capacity.

d) Invest a substantial amount of money at one time to increase capacity. Investments in fixed assets are capital-intensive, meaning they require large payments at one point in time.

What is a reasonable alternative to keeping an emergency stash of cash? a) Investing in long-term bonds b) Investing the money in a nicer car c) Investing in high-risk growth stocks d) Investing in a savings account

d) Investing in a savings account Investing in a readily withdraw-able account that still earns some interest is a value-preserving alternative.

What are three principles of budgeting that are important to know before beginning the budgeting process? a) Improve your credit score; understand the key areas of savings, income, and expenses; and categorize all expenses b) Eliminate debt, evaluate your personal financial performance, and consult a certified financial advisor c) Know yourself, reduce variance in spending, and consult a certified financial advisor d) Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives

d) Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives All three of these principles are included in the six principles of budgeting as discussed in the course. The other three principles are know yourself; understand the key areas of savings, income, and expenses; and eliminate consumer debt and minimize long-term debt.

You are a financial manager of a company, and you have projected sales increase for next year of 8%. Which action would you take when you conduct financial forecasting using the percent of sales method? a) Leave the cash account constant in the projected financial statements. b) Change the notes payable account in proportion to sales growth. c) Change the long-term liabilities account in proportion to sales growth. d) Leave the notes payable account constant in the projected financial statements.

d) Leave the notes payable account constant in the projected financial statements. Notes payable is a discretionary account. Thus, you should leave it constant in the projected financial statements.

Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? a) Making credit standard decisions b) Making investment decisions c) Making inventory control decisions d) Making financing decisions

d) Making financing decisions The manager is deciding where to get the funds to support a new project, which means the manager is making a financing decision.

Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing? a) Technical b) Ethical c) Legal d) Moral

d) Moral This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas's own sense of right and wrong.

Nora is an investment manager, which means that she is paid to invest other people's money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma? a) Nora is not explaining to her clients the riskiness of the specific investment. b) Nora is uncertain about the outcome of the investment opportunity. c) Nora is not currently meeting her goal for the month. d) Nora is considering investing in a risky asset just to meet her monthly goal.

d) Nora is considering investing in a risky asset just to meet her monthly goal. Nora is caught between the obligation to meet her goal and the obligation to keep her clients' money safe. As an investment manager, she is obligated to do what is best for the client.

Which type of financial institution deals mainly with providing for retirement through employers? a) Investment bank b) Credit union c) Mutual fund d) Pension fund

d) Pension fund Through employers, individuals can contribute to pension funds, which then invest their money in the market to provide retirement funds.

You are considering four projects. The initial cost to start each project is $500,000, and the total cash inflows generated by each project are $600,000. Each project also has the same level of risk. The only difference between these four projects is the cash flow patterns. Year 1- Year 2- Year 3 Project A$200,000 $200,000 $200,000 Project B$300,000 $200,000 $100,000 Project C$100,000 $200,000 $300,000 Project D$600,000 $300,000 -$300,000 Given the information above, which statement is correct about these four projects? a) Project C should be chosen first given that this project takes the longest time to receive cash summing to $600,000. b) All projects should yield the same amount of value for the firm. c) Project A should be chosen first given that the estimated cash flows are steady. d) Project D should be chosen first given that the project will receive cash to sum to $600,000 the most quickly.

d) Project D should be chosen first given that the project will receive cash to sum to $600,000 the most quickly. Project D receives cash flows the most quickly of the four projects. Given the concept of the time value of money, Project D should generate the highest NPV.

What is a component of the DuPont framework? a) Fixed asset turnover b) Times interest earned c) Current ratio d) Return on assets

d) Return on assets ROE is ROA times leverage multiplier.

Endothon Company has decided to move its production from the United States to a foreign country. Which situation below would constitute an unethical action by the company? a) Telling current employees about the decision early on b) Monitoring public perception of the company c) Lowering costs while keeping prices the same for customers d) Saving money by paying inadequate wages to workers overseas

d) Saving money by paying inadequate wages to workers overseas Other countries may not have laws that protect workers, such as minimum wage laws.

In which financial market are securities such as stocks and bonds are traded after their initial issuance? a) Initial market b) Primary market c) Dealer market d) Secondary market

d) Secondary market Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.

Which method should you use to calculate a bond value? a) The perpetuity model b) The IRR method c) The constant growth model d) The PV function in Excel

d) The PV function in Excel You should use the PV function in Excel given the rate, FV, nper, and rate input variables.

What part of the NPV calculation is very important but difficult to estimate? a) The life of the project b) The expected cash flows c) The initial outlay d) The cost of capital

d) The cost of capital The cost of capital is affected by several things, such as different capital structures, timing of cash flows, and investment potential, which makes it difficult to calculate. An inaccurate prediction of the cost of capital may cause a firm to miss out on good projects or accept bad projects.

You calculate the PI of a project to be 1 but realize that some aspect of your calculation was incorrect and needs to be adjusted. Which adjustment to the PI estimation should cause you to reject the project? a) The length of project was underestimated, so in the new estimation, the life of the project is a couple of years longer with positive cash flows. b) The cash flows were underestimated, so the adjusted annual cash flows are higher than the original ones. c) The initial outlay estimation was inaccurate, and after you adjust it, the new initial outlay is lower than the original. d) The cost of capital was underestimated, so you adjust the cost of capital to be higher.

d) The cost of capital was underestimated, so you adjust the cost of capital to be higher. Increasing the cost of capital decreases the PI. Therefore, the new PI will be less than 1, and you should reject the project.

What is the main difference between the current ratio and the quick ratio? a) The quick ratio is faster to calculate than the current ratio. b) The quick ratio is used for smaller companies, and the current ratio is used for larger companies. c) The quick ratio includes accounts receivable in current liabilities, and the current ratio does not. d) The current ratio includes inventory in current assets, and the quick ratio does not.

d) The current ratio includes inventory in current assets, and the quick ratio does not. Inventory is the least liquid of all current assets. By not including inventory, the quick ratio is a more stringent test of a firm's ability to meet short-term obligations.

What is the sustainable growth rate (SGR)? a) Accounts that do not vary with sales but are up to management's discretion b) Accounts that vary with the change in sales c) The external financing needed to meet the projected growth d) The growth rate that allows a firm to maintain its present financial ratios without issuing new equity

d) The growth rate that allows a firm to maintain its present financial ratios without issuing new equity The SGR is the growth rate that allows a firm to maintain its present financial ratios without issuing new equity.

What is the relationship between the risk and the rate of return? a) Investors must be incentivized with higher returns or else they will choose a risk-free asset. b) Risk has no relationship to the rate of return but is related instead to the cost of capital. c) The rate of return describes the inherent risk of a project. d) The higher the risk investors have to take on, the higher return they require.

d) The higher the risk investors have to take on, the higher return they require. Investors will take on more risk if there is potential for a higher return.

What does the net margin measure? a) The percent of sales remaining after covering COGS and operating expenses b) The percent earned on each dollar invested in the firm c) The percent of revenue remaining after COGS has been taken out of sales d) The percent of revenue that is retained as profit for the firm

d) The percent of revenue that is retained as profit for the firm The net margin is net income divided by sales, which tells us how much a firm actually gets to keep after paying all its expenses.

In what way are coincident indicators useful? a) They are useful in conjunction with GDP and personal income to predict the future health of the economy. b) They are used to predict future economic trends so that recessions can be avoided. c) They help investors know which sectors of the economy to invest in. d) They are analyzed during economic shifts to provide information about the current state of the economy.

d) They are analyzed during economic shifts to provide information about the current state of the economy. Coincident indicators help analysts see the big picture of economic trends.