FIN 301 Test Quiz Answers
what should not be capitalized on the balance sheet
SG&A
how did enron get caught
Sherron wright was a snitch
CCC of 40 days means
after suppliers are paid, it is 40 days until cash is received from customers
which activity would most increase shareholder value
allocating capital to investments with the highest risk adjusted return
definition of goodwill
amount paid for a company acquisition in excess of book value
which should not be disclosed
amounts expected to be paid for labor for future sales
where do capitalized expenses go
balance sheet
what is true about specialized financial statements
banks may have debt equal to 95% of total assets
what has Heinz done
been purchased by private euqity
which of the following responsibilities fall under the CFO's role as company treasurer
capital expenditures
what is not on cash flows from financing activities
cash
which of the following is an example of a short term asset
cash
where would you expect to find stock buybacks in financial statements
cash from financing
which of the following do government battles result from
challenges to corporate, companies not being managed in the interest of owners, firms not adhering to rules
Warren Buffett likes what
companies with free cash flow
what is the current trend of corporate governance
company buyouts by hedge funds and private equity are becoming more prevalent
DSO of over two years means
company's customers are not paying their bills
controller is responsible for
compiling financial statements
which of the following CFO roles pertain to the accounting department
controller
long run stock prices are driven by
corporate earnings
what is not a tool of finance
cost benefit analysis
what represents successful shareholder value creation
cost of capital < ROI
world's largest market
currencies
liquidity ratios
current and quick ratio
what is the theory of efficient capital markets
current stock prices reflect all publicly available information
what is working capital
day to day financial activities
the random walk hypothesis states that
day to day stock prices move randomly and independently from one another
what is true of debt v equity financing
debt financing provides a tax shelter because interest payments are tax deductible
what is true about the balance sheet
deferred taxese can be an asset or liability
who is known for CCC
dell
whose operating cycle is lower dell or boeing
dell
net fixed assets on the balance sheet are net of which of the following items
depreciation
to achieve the highest level of return you have to
diversify your investment into different asset classes
dividend divided by EPS
dividend payout ratio
what are on cash flows from financing activities
dividends, changes in long term borrowing, changes in capital stocks
what is true about stock buybacks
does not commit company to pay dividends
the hostile takeovers in the 80s were made possible by
easy financing with junk bonds
what is the advantage of equity financing
equity has no fixed repayment obligation
what is a common element in a financial crisis
excessive investment in an asset class
cash flows from operations are a use of cash on the cash flow statement
false
companies are managed according to the interest of the majority owner in the Japanese model of corporate governance
false
what is true regarding capital budgeting
first step is strategic planning, evaluation of discounted cash is necessary, cash flows are negative at first, ROI > COC ideally NOT negative NPV will always occur when initial cash flows are negative
what is the ultimate financial shenanigan
fraud
which model is best described as dedicated capital
germany
what is known as the fear index
gold price
how can you improve CCC
grant discounts for paying in cash
what is an element of the new corporate finance environment
greater economic volatility and risk
what has a higher asset turnover: utility or groceries
groceries
Japanese companies
have fewer takeovers than US companies
why has herbalife been in the news
hedge fund managers have been fighting over their investment positions in the company
companies report what for the IRS
higher depreciation and lower net income using accelerated depreciation for fixed assets
days payable outstanding means
how long it takes for a company to pay bills
examples of capital budgeting
if ford invests in a new plant to manufacture the new F150
Which of the following would reduce returns of your investment portfolio
increase in brokerage commissions
an increase in accounts receivable
increases a cash flow
What happens to the cost of capital after a company reaches an optimal capital structure and continues take on debt?
increases due to the cost of financial distress
what would make a profitable company run out of cash
increasing inventory for a sales increase
what are examples of working capital management
increasing inventory turnover by carefully monitoring specific product categories lowering days payable by keeping up to date supply chain information lowering outstanding inventory by selling it in bulk to retail customers
what is one of three primary areas of finance
institutions and markets
the primary business of Berkshire Hathaway is
insurance
what investment vehicle did charles ponzi use in the original ponzi scheme
international reply coupons
for a retailer what would have the highest percentage of current assets
inventories
what are balance sheet accounts associated with working capital
inventory, short term loan, accounts payable, cash
PPE is a cash flow from
investing activities
yield curve is upward sloping because
investors require higher returns for long term maturities
risk aversion means
investors take small risks but do not avoid risk at all costs
the federal government
is a corporate stockholder
why is the yield curve important
it is the base cost of capital
what does the efficient market hypothesis say about using technical analysis to forecast future stock prices
it is useless
If a stock is currently trading at 100 but a company says they will acquire that company's stock for $120 then what will happen to the stock according to the efficient market hypothesis
it will increase as soon as the announcement is made
which of the following corporate governance models include partnering with other top companies
japan-germany
each item in the liabilities section of a balance sheet is expressed as a percentage of
liabilities and stockholder's equity
what ratio sees if borrowers can pay their interest payments
liquidity ratios
what is true regarding WACC
lower WACC increases firm value because the present value of the firm's future cash flows is higher
what would result in a lower WACC
lower interest rate on debt
If you invest in a stock with a beta of .7 you would expect your return to be
lower than that of the overall market
what does a stock repurchase mean
management believes stock is undervalued
what is an example of an agency problem
management invests in private jets for all executives
what is a principle held by gordon gecko
management must be accountable to the shareholders
behavioral finance believes that
markets are not always efficient
successful liability management means
minimizing cost of capital
capital structure management is managing a company's
mix between debt and equity
PPE are listed at
net value
are R&D tangible and do they go on the balance sheet
no
are companies allowed to record expenses that are associated with current revenues in later periods
no
do stock splits affect market cap
no
has macy's profit margin declined since 2009?
no
has there been an increase in global regulation in corporate finance
no
Which company would you expect to invest the most in plant and equipment
oil and gas
what is the primary source and primary use
operating, investing
what should be?
prepaid insurance, PPE, and prepaid rent
what does the controller do
prepares financial statements and reports
what is true of behavioral finance
prices reflect emotions and biases
managements overall performance is best gauged by
profitability ratios
dual challenges of management
providing high quality product/services and competitive returns to stockholders
what are some control mechanisms to ensure management acts in the best interest of shareholders
proxy contest, board of directors, stock based comp, threats of hostile takeover NOT management perks
what was an issue with internal control in the 80s
proxy rules favored companies
what is acceptable revenue recognition practice
recognizing revenue prior to cash from the customer being received
inflation reduces your return by
reducing the value of the money you receive on the investment
what is deriving the most income for every dollar of assets
return on assets
what ratios determine management effectiveness on creating shareholder value
return on investment, cost of capital
an income statement expresses everything as a percentage of
revenues
bill ackman
runs pershing square
management must act in whose interest
shareholders
what is true of the US Model of corporate governance
shareholders are represented by a board of directors
what is true of strategic financial management
short term assets are a component of working capital
which shows company financials over a period of time
statement of cash flows, income statement
the shift in corporate governance gave corporate executives more incentive to drive company performance by compensating with
stock options
companies now prefer what over dividends
stock repurchases
the basic principles of finance dictate that in the short run, stock prices are driven by
supply and demand
what is the primary trade off in capital structure
tax savings and financial distress costs of debt
NASDAQ reflects the performance of what stocks
tech
What do behavioral financiers not believe
that decision makers make rational decisions that maximize utility
which is true regarding dividends and stock buybacks
the dividend payout ratio is the annual dividend divided by annual earnings
what liabilities should be disclosed
the expected costs of warranty, debt owed to banks, long term obligations to pension, amounts owed to suppliers
what is more useful
the income statement
CCC
the number of days the customer pays the supplier to when the customer pays the company
what characterizes the new paradigm of working capital management
the optimal level of current assets is where carrying costs equal shortage costs
what happens after an activist investor buys shares of a company
the short and long term effect on the stock is typically positive
what role of the CFO pertains to the finance department
the treasurer
what is true about the cash flow statement
there are three sources and uses of cash
which of the following contributed to failure of internal control mechanisms in the 1980s
there were too many small stockholders
the use of common size income statements
they are useful to determine trends for industry comparisons
what is true of stockholders
they have residual claims on cash flows
stock repurchases boost stock price because
they reduce shares outstanding and increase ROE and EPS
why would companies aim to grow their market cap
to increase shareholder value, to utilize equity financing, to utilize stock to make acquisitions, to compensate management with shares of the company
why do people invest
to make money
why do companies misrepresent earnings
to meet benchmarks, to influence stock
what is the primary goal of capital structure
to reduce the cost of capital
why would a company take an unnecessary reserve if it reduces profit
to save a source of revenue in the future
why would a company capitalize its cost
to show higher profits in current period
the efficiency of management is best measured by which ratio
total asset turnover
on a balance sheet, debt is expressed as a percentage of what
total liabilities and shareholders equity
what is a up front cost of 5% an example of
transaction cost
Companies cannot pay a dividend without having positive cash flows from operating and investing activities unless they use excess cash.
true
Oren Harari believes it is wrong for management to try and enhance shareholder value
true
The DJIA is the best known index of any market in the world
true
The Federal Reserve has taken action to lower interest rates on the yield curve.
true
a company should always invest in a positive NPV project
true
a company's earnings should correlate with its cash flows
true
a computer company must record a warranty as a liability when it makes a sale
true
academic advancements are widely used by the markets
true
changes in current assets and liabilities are NOT adjustments to financing activities
true
companies want to have the highest days payable outstanding as long as it does not hurt their credit rating or ability to buy on account
true
diluted EPS accounts for executive sock options
true
enron was a commodities corporation that kept debt off its balance sheet
true
great companies do not always make great stocks
true
in the angloamerican model, the board of directors is elected to represent shareholder interests
true
investors believe that transaction costs, taxes, and inflation are the enemy bc they reduce the return on your investments
true
market cap is NOT equal to shareholder's equity
true
profit margins are at an all time high
true
small cap stocks are riskier than corporate bonds
true
the level of capital expenditures follow the trend of the economy over time
true
the optimal current ratio is not 2.0
true
two thirds of misstatements of financial information are related to revenue recognition
true
what type of company would have the highest degree of leverage
utility
which stock is less risky? biotech or utility
utility
what is true about corporate governance in late 90s and early 2000s
wall street analysts were making biased stock recommendations
what is the biggest cost associated with holding inventory
warehousing and capital
crown jewels
when a company is targeted for hostile takeover and responds by selling off its assets
are capital expenditures depreciated
yes
the average ROE of the S&P 500
15%
if Apple's stock was at 260 a year ago and trades at 320 today and there was a $10 dividend, what is the return
320-260 + 10 / 260 = 26.9%
once an investor owns what of a company's shares, he must fill out a SEC form 13-D
5%
how was corporate governance in the 90s different from that in the 80s
90s had more managerial stock ownership
communication with markets is the responsibility of which role
CFO
what is a long term asset category
PPE
depreciation is
a cash flow from operating activities
what is a working capital
a company changes its credit policy
DSO is the time frame from when
a company makes a sale to when it collects its accounts receivable
time value of money states
a dollar tomorrow is worth LESS than a dollar today
an example of capital budgeting is
a pharma company building a new research facility
which of the following is the relationship between risk and return
a risk averse investor would prefer less standard deviation
when does pac man defense occur
a target company makes a counter takeover bid for the acquirer
why would a startup organize as a corporation
ability to raise capital
how well a firm puts to use its productive resources
activity ratio