Finance Foundations - LinkedIn Learning Final Exam
What does the weighted-average cost of capital provide to a business?
a way to evaluate the attractiveness of various projects
You are a small investor with a couple thousand dollars to invest. You are willing to pay experts to pick stocks for you. Which type of investment are you making?
an investment in a managed fund
You have been added as a member to a publicly traded company's board of directors. What is meant by the "fiduciary duty" you now have?
directing the company in ways that will maximize shareholder value
You are starting to work seriously on your future financial stability. How can you avoid the short-term risk inherent to investing?
have a long-term planning horizon
Which two factors are involved in the risk-free interest rate under the Capital Asset Pricing Model?
inflation and time-value of money
Which factor most significantly impacts share prices?
market information
You are now retired and decide you want to spend your retirement touring the country in an RV. Yet, when you crunch the numbers, you decide not to. What factor is not included in your calculations?
the enjoyment you could have received from the RV
What information, found in a company's price-to-earnings ratio, may be of interest to investors?
the expected growth of future earnings
You have the opportunity to buy a robotic order-picking machine for $100,000. Disregarding any increase in productivity, what has to be considered in making an investment?
the opportunity cost of making another investment
Which item is used to calculate Debt Ratio?
total liabilities
In which situation would a company prefer equity financing over debt financing?
when a company chooses to have low leverage
Why is the "equity risk premium" an important concept to understand in finance?
It is the "premium" or extra return offered to accept risk by investing in stocks.
ABC Corp. has reached $700 million in sales, and wants to buy its competitor XYZ Corp. As Finance Manager, what should you expect when you approach an investment bank to help you with the acquisition?
Someone will underwrite the transaction involved in purchasing XYZ.
Why would a business pay premiums to an insurance company?
The assets backing the bonds were not as strong as purchasers expected them to be.
How can you best describe the "operating cycle"?
The operating cycle is the conversion from inventory to receivables to cash.
What is investment diversification?
The process of spreading out your investments in several places.
Why do stock index funds have a higher rate of return than corporate bonds or savings accounts?
There is more risk with a stock index fund.
Theoretically, how should a business choose between borrowing and equity in its capital structure?
They should choose to borrow, because interest payments are tax-deductible.
Which indication does a balance sheet make?
a company's total assets along with its liabilities and owners' equity
ABC Corp has a risk-free rate of 5%. If XYZ Inc has an equity risk premium of 6% and a beta of 1.1, how is the required rate of return for investment in XYZ calculated using CAPM?
5% + (6% x 1.1) = 11.6%
Which capital structure should provide the lowest Weighted Average Cost of Capital?
50% debt, 50% equity
ABC Corp. is expanding and seeking financing. In what financing mix will lenders expect a higher return?
90 percent debt and 10 percent equity
Of the various common ratios, which ratio is a measure of a company's efficiency?
Asset Turnover
What is Beta and how does it relate to risk?
Beta is the risk that cannot be avoided through diversification.
How does "discounting" work in capital budgeting?
Future cash flows are discounted by the interest rate.
Which feature of the stock market makes people more likely to invest in a corporation?
If someone no longer wants to be an owner of the corporation, the shares can be sold.
How does "what you need to buy" relate to finance?
Insurance companies shift risk from the business to themselves.
Which action is the most prudent to ensure flexibility in your personal finances?
Keep fixed costs low.
Why does equity generally cost more than debt financing?
Lenders have legal protection, while investors do not.
An ideal capital structure would involve no owner equity and 100 percent borrowing. Why is this capital structure not realistic?
Lenders will be wary of a company with a high amount of debt.
ABC Corp is considering going public. Using the P/E ratio to set the initial price: if earnings per share are $3 and the industry average P/E ratio is 15, which formula generates a safe price for the IPO?
P/E ratio 15 x EPS $3 = $45
Which statement is correct about bonds but NOT about stocks?
Payment amounts to the investor are fixed.
Why should you utilize financial institutions to handle your investments?
You are able to outsource complicated tasks to an expert.
When you are managing receivables, which balance must you establish if you extend credit to avoid lost opportunities from having insufficient cash?
You must balance increased sales with the cost of bad debts and lost use of money.