ENT4412 Final Exam
If you borrowed $150,000 to invest in a new business storefront at an 8% interest rate and pay approximately 35% in federal/state taxes, what is your post-tax cost of debt?
$7,800
You have purchased inventory from a supplier on credit. Their terms are 2% 10 net 30. If you wanted to delay accounts payable payments, which terms below would be the best to negotiate with your supplier?
2% 10 net 45
Broadly defined, how many types of customers are there?
4
What should a business do to decrease the foreign exchange risk?
Accept only US dollars
How can a purchaser offset risks in applying discounts?
Adjust revenue projections, the "Earn-Out" clause, non-compete agreements, and illiquidity discount
Why should you fund projects internally with cash from profits, as opposed to debt or equity financing, when possible? - You can retain all of your assets - All of the answers are correct - You can maintain decision-making and ownership of your company - You can avoid costs of debt such as interest and risk of default
All answers are corect
Which of the following must be considered when using he discounted cash flow method to value a business? - timing of cash flows - risk of cash flows - amount of cash flows - amount, timing, and risk of cash flows
Amount, timing, and risk of cash flows
ABC Corp is considering its capital structure options. Which option is most likely to result in increased productivity for ABC's existing workforce?
Borrowing money
Typical types of insurance for small business include
Business Interruption
You are considering buying your first house. You have a large income. How should you purchase the house, putting risk aside?
Carry a large mortgage on the house
Which of the following statements about business valuation is not true? - multiples reflect market behavior including demand and perceived risk - commonly available businesses are priced with a higher multiple - deal structure is a vital component of the valuation process - a company's adjusted net income considers owner's salary and cash benefits
Commonly available businesses are priced with a higher multiple
If you are valuing a piece of equipment by considering its replacement cost today less any depreciation or wear and tear, you are utilizing the asset valuation technique referred to as __________.
Cost approach
Based upon your analysis of a competing service provider's fees and a survey about potential customers' perception of pricing, you decide to offer a good-better-best three-tiered pricing structure in addition to offering repeat customers 10% off their second purchase and 15% off their third purchase. You have adopted all of the following pricing strategies except:
Cost-based pricing
Your furniture business sells couches. You price those couches to account for the cost you paid for the couches plus a standard markup you have established. You are using a __________ strategy.
Cost-based pricing
Your company is strapped for cash is having difficulties making payroll. Which of the following actions would not alleviate your cash flow issues? - Prioritizing or eliminating expenses - Extending accounts payable - Selling or leasing assets - Delaying accounts receivable
Delaying accounts receivable
What type of insurance covers costs or damages as a result of any directors or officers in your organization being involved in a lawsuit?
Directors and officers insurance
Which of the techniques listed below can be used to evaluate and investment? - Net Future Value - Discounted Cash Flow - Internal Rate of Success - Compounded Cash Flow
Discounted Cash Flow
If you are concerned about how efficiently your company is generating sales with the assets it has, which DuPont Framework indicator would you be most interested in?
Efficiency
ABC Corp can raise $1 million with half-debt and half-equity. Which concept would be working if the debt was at a lower than usual interest rate, and the equity financing at a higher than usual required rate of return?
Equity cushion (lenders offer a lower interest rate because tehy have a cushion of $500k. Since lenders are paid first, investors require a high interest rate.)
Multiplying a company's price-to-book ratio by a company's book value per share is an application of ________ to value a business.
Equity multiples
Which of these forecasting techniques has the advantages of being easy to calculate and reacts quickly to changes in demand caused by trends or seasonality?
Exponential Smoothing
Which of the following statements about factoring is true?
Factoring is common in industries with low receivables turnover.
Which of the firms below will have the highest ROE? - Firm B with leverage of 2.5 - Firm C with leverage of 2.0 - Firm A with leverage of 2.9 - None of the above - leverage does not affect ROE
Firm A with leverage of 2.9
What does the weighted average cost of capital tell you about a business?
How much it costs the business to acquire money
Recently, you recognized the need for help and hired two new employees to count and sort inventory in your warehouse facility. This is an example of _________ costs.
Human capital
Why should finance managers understand the cost of capital?
If the cost of capital is below the expected return, the new project should be undertaken
If your business is currently experiencing cash flow issues, which of the following actions would you avoid? - Reducing operating expenses - Reducing collection times for receivables - Increasing inventory - Delaying current accounts payable
Increasing inventory
Which of the following statements about off-balance sheet items is not true? - The director of the company can be held liable by other stakeholders for losses and negligent behavior - Operating leases need to be included in the monthly/annual budget and cash flow statements - Interest Rate Risk is directly aligned with the top management compensation - Lenders will not provide funding to new or struggling companies without the owner(s) signing personal guarantees
Interest Rate Risk is directly with the top management compensation
Which of the following can be considered a category of concern for off-balance sheet items?
Interest rate risk
If you are calculating your firm's quick ratio, which of the following are not considered to be a "quick asset"?
Inventory
In order to enhance production capabilities, your company purchased a new piece of equipment. The payment for the new machine would be found under which of the following categories of the cash flow statement?
Investing
Cash Flow statements are divided into the following three sections:
Investing, Operating, and Financing activities
Which of the classifications of financial ratios would be most interesting to a financial manager concerned with the company's ability to meet its short-term obligations?
Liquidity
Since many small-to medium-sized businesses are not actively publicly traded, it is challenging to utilize the ________ to value those businesses and their shares.
Market approach
To accomplish your goal of gaining substantial market share in a new market with your unique product, you decide to set your prices as low as possible with hopes that you can raise them once you have a substantial customer base. This strategy is referred to as
Market penetration
In Capsim, forecasts are created in
Marketing
In Capsim, the four areas in which decisions are made are:
Marketing, research & development, production, finance
General liability insurance covers damages to a person or to property caused by
Normal business operations
Which of the following factors can create economic dependence for a business? - One customer represents the majority of the company's revenue - Multiple sources of revenue - Expansion on multiple markets - A rapid increase in new customers
One customer represents the majority o the company's revenue
Which of the following profitability indicators considers deductions for cost of goods sold, selling, general and administrative expenses but does not include deductions for taxes and interest?
Operating profit
7 Functions of Operation Management
Operational Management, Finance, Product Design, Quality Control, Forecasting, Strategy and Supply Chain Management
You have noticed increasing shipping and handling fees with one of your suppliers. Your number of orders with this supplier per year has also increased. The shipping fees would be considered______________.
Order costs
If you are analyzing the discounts you are offering customers and evaluating how those discounts are impacting your ability to collect the sales price for your products, you are focusing on your business' __________ capability of value-based pricing.
Price management
If you are evaluating the effect that a change in price will have upon customer demand for your product, which of the following value-based pricing capabilities are you considering?
Pricing economics
Cash flow is one of the highest business priorities because:
Profitable companies may still experience cash flow problems
Based on the information presented in the Module, which forecasting frequency, typically produces the most accurate results?
Quarterly
The DuPont framework breaks down a company's _________ into three components for further analysis.
ROE - Return on Equity
You have received a shipment of product components but they have not yet been processed in your facility. These goods would be an example of ____________.
Raw Material
In Capsim, the establishment of quality and reliability factors is done in
Research & Development
Which kind of forecast can be used in a stable industry and stable market that is not impacted by seasonality?
Rollover forecast
In a manufacturing firm, the master budget begins with a forecast of ________.
Sales
Which company departments need to be involved in developing a sales forecast?
Sales, Marketing, Finance, Operations
When considering the sales cycle's impact on cash flows in a manufacturing business offering credit, which of the following statements is false? - Selling the product and collecting the cash for credit sales occur simultaneously - The purchase of raw materials represents a cash outflow - Cash inflows occur when receivables are collected - Cash is spent on the process of converting raw materials into finishing goods
Selling the product and collecting the cash for credit sales occur simultaneously
Which of the following is the least effective effort in collecting overdue receivables? - Send paper statements to customers - Contact the customer via phone or email - Send overdue accounts to collections and cancel customer credit immediately - Meet with customer to discuss overdue accounts
Send overdue accounts to collections and cancel customer credit immediately
The DuPont framework is composed of the following performance indictors except: - profitability - efficiency - solvency - leverage
Solvency
Opportunity cost is __________.
The benefits an individual , investor or business misses out on when choosing one alternative over another
Which of the following situations would not contribute to declining liquidity ratios? - The company is taking longer to pay its suppliers relative to net income figures. - The company has increased liquid assets, such as cash, to satisfy short-term debt - The company has taken on additional debt to cover operating expenses - The company has sold assets but has not paid down its debt
The company has increase liquid assets, such as cash, to satisfy short-term debt
In Capsim, the proforma shows projected results but it is only as good as
The forecast
A company could utilize the economic order quantity model to determine _____________.
The optimal number of units per order
The internal rate of return method shows
The profitability of investments and takes into account the time value of money
You are a lender and two companies approach you for a loan. One is a trucking company and the other is an internet service provider. Which one are you more likely to choose?
The trucking company, because it has more physical assets you can seize if it does not repay the loan
How does leverage affect a company's Capital Structure?
When a company borrows money, it can use that money to purchase more assets
In Capsim, scoring is based on
Year over Year improvement in all areas
Debt financing means _________ while equity financing involves _____________.
You are borrowing money that must be repaid with interest; you selling shares of your business in exchange for money
You are considering taking on an equity partner in your company. Which of the following scenarios is most likely an advantage of an equity partnership?
Your equity partner has core competencies complimentary to your skill set.
If you offer credit to your customers, which of the following is least likely to occur as a result of you offering that credit? - Some of your customers may not pay - You could incur costs related to managing the receivables - You may experience cash flow issues if customers pay late - Your sales will likely decrease
Your sales will likely decrease
Operations Management
a process that involves efficiently managing the resources and methods devoted to a company's production of sales or goods
The leverage component of the DuPont Framework can be calculated by dividing a firm's ___________ by its ____________.
assets; equity
All of the following are disadvantages of having too much inventory except: - reduced availability of cash - difficulty in storage and control - increased risk of product obsolesence - reduced holding costs
reduced holding costs
The _________ budget includes activities and planned expenditures that occur outside of production.
selling, general and administrative
Why do businesses engage in split debt-equity financing?
they can take the tax advantage of borrowing, while also offsetting the cost of capital required by owners equity
Market-approach valuation
used most often for small businesses; this model looks at the industry and compares the value with small businesses
Income-based valuation
utilized for businesses that don't have many assets; based on a business's potential for future income
Asset-based valuation
when a business is no longer profitable, like a liquidation, where the value comes from inventory and equipment assets
