Finance Final Exam

Which of the following is the best reason to use the payback method to evaluate investments?

The payback method is easy to use and understand for most people, regardless of training.

Which of the following is a possible market reaction to a company's announcement that it will increase it's quarterly dividend?

The share price may increase because the increased dividend signals that future earnings will be higher than the market currently expects.

Which of the following changes after a stock splits?

The stock's per share price.

Under the best capital structure of a company, the goal of it is to maximize:

The value of the company.

In which of the following situations would it be appropriate to use the IRR method to make an investment decision?

To compare two projects that have an equal initial investment and lifespan.

When evaluating the cash flows from a project, a financial manager needs to analyze the:

costs, benefits, and opportunity costs of the project.

A person borrows money from one lender at a low interest rate and uses the funds to repay his higher interest rate debt obligations. This is an example of _____.

debt consolidation

Complete the following statement so that it is always true: If a company has significant working capital, _____.

it will probably be able to obtain credit at a lower interest rate.

A company is a late stage startup. What should be its target rate of return for its equity?

30%-50%

Which of the following is an acceptable strategy for managing a company's disbursements?

A company should distribute payroll after the point when banks will clear checks for that week.

Which of the following statements correctly describes the balance between debt and equity as described in the trade-off theory?

A company should should use debt until its costs exceeds its benefits; then use equity for the rest.

If a company with stable earnings wanted to ensure that its managers' interests are aligned with the company's shareholders, which of the following capital structures should it use?

A debt-heavy capital structure that maximizes returns to shareholders by magnifying ROE, maximizing the tax shield, up to the point that these benefits are higher than anticipated bankruptcy costs.

If a company wanted to ensure that its managers' interests are aligned with the company's shareholders, which of the following capital structures should it use?

A debt-heavy capital structure.

Which of the following describes how an externality can affect a market?

A negative externality can lead to over-production.

Which of the following accurately describes how a stock dividend differes from a stock split?

A stock dividend is paid using already issued shares; a split requires new shares to be issued.

When a company files Chapter 11 bankruptcy, which of the following statements accurately describes an action the company's management can take?

Acquire financing and loans on favorable terms by giving the lenders first priority on earnings.

Which of the following influences how a dividend is reported on a company's books?

All of these answers

Which of the following is a benefit of a company paying a smaller dividend?

All of these answers

Which of the following statements is true about companies that pay a high dividend?

All of these answers

A company that manufactures 4th of July decorations is looking to improve its inventory management. Which of the following should it consider as it redesigns its inventory system?

All of these answers.

In a perfect market as proposed by Modigliani and Miller, which of the following statements is true?

All of these answers.

In a perfect market, which of the following statements is true?

All of these answers.

In which of the following situations would using the payback method to evaluate an investment be a good idea?

All of these answers.

The Modigliani-Miller theory suggests that it doesn't matter to a shareholder whether a company issues dividends. Why might that theory not be applicable to the US stock market as it currently exists?

All of these answers.

Under Miller and Modigliani's theory, business income taxes encourage business's to take on debt instead of selling it equity. Which of the following is a reason why that would be the case?

All of these answers.

Which of the following correctly defines a factor that influences a company's working capital financing decisions?

All of these answers.

Which of the following correctly defines one of the four main areas of variability that must be considered during working capital management?

All of these answers.

Which of the following could be a sunk cost?

All of these answers.

Which of the following explains why working capital may not be a pure measure of short-term assets and liabilities?

All of these answers.

Which of the following factors explain why a company's capital structure is relevant to its value?

All of these answers.

Which of the following factors need to be considered evaluating a company's working capital strategy?

All of these answers.

Which of the following is NOT included in calculating a project's NPV?

All of these answers.

Which of the following is a common way for a business to obtain leverage?

All of these answers.

Which of the following is a correct definition of Net Present Value?

All of these answers.

Which of the following is a drawback of share repurchase for shareholders?

All of these answers.

Which of the following is a method of payment a corporation can use to pay a dividend?

All of these answers.

Which of the following is a possible market reaction to an stock repurchase announcement?

All of these answers.

Which of the following is a reason a company might have for initiating a reverse stock split?

All of these answers.

Which of the following is a reason a company would hold marketable securities?

All of these answers.

Which of the following is a reason to always have cash on hand?

All of these answers.

Which of the following is a shareholder benefit associated with a dividend reinvestment program (DRIP)?

All of these answers.

Which of the following is a way cash flow factors can be used to improve a business?

All of these answers.

Which of the following is a way the internal rate of return (IRR) is used in capital budgeting?

All of these answers.

Which of the following is an advantage of using the NPV method to evaluate different projects?

All of these answers.

Which of the following is an element needed to calculate an asset's depreciation?

All of these answers.

Which of the following is an element of a company's dividend policy?

All of these answers.

Which of the following is an example of an opportunity cost?

All of these answers.

Which of the following reasons is a reason why a higher discount rate generally means a lower NPV?

All of these answers.

Which of the following statements regarding the clientele effect's influence on stock price is true?

All of these answers.

Which of the following statements regarding the use of the pecking order theory is true?

All of these answers.

Which of the following types of companies would benefit from higher operating leverage?

All of these answers.

Which of the following is the correct order of steps in a basic accounting flow?

Analyze the transactions, make journal entries, make adjusting entries, prepare statements.

How does inflation influence inventory levels?

As inflation increases, inventories tend to increase.

The sum of cash revenues and expenditures over a period of time.

Cash Flow

An individual file for bankruptcy. Through this proceeding, the debtor "reorganizes" his debt, is allowed to keep some of his property, but must use some of his future earnings to pay off his debts. What type of bankruptcy is this?

Chapter 13.

Which of the following statements regarding what dividends can mean to prospective investors is true?

Dividends provide consistent returns on relatively low risk investments

A company wants to adjust its working capital by adjusting its current liabilities. Therefore, the company should focus on its ____.

Financing management.

Which of the following statements regarding the cost of capital and its effect on capital structure and investment choices is correct?

For an investment to be worthwhile, the expected return must be greater than the cost of capital.

Which of the following statements regarding refinancing risk is correct?

Generally, liabilities should be self-liquidating.

Managers of publicly traded corporations are often compensated at least in part based on firm profitability, and shareholders prefer higher stock prices to lower stock prices. Stock prices are determined at least in part based on firm profitability, so it appears that mangers' interests and stockholders' interests are well-aligned. Which of the following is true about conflicts between managers and shareholders?

Instead of returning free cash flow to investors in the form of dividends or stock buybacks, managers may invest cash flows in projects that are not expected to yield adequate returns in order to create some growth.

Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes?

Internal rate of return is an indicator of the efficiency, quality or yield of an investment.

Which of the following regarding the possible financial impacts of leverage of a company is correct?

Involuntary leverage is typically caused by eroding equity value, not additional debt.

A company needs to obtain short-term financing due to an unexpected event. Which of the following options should it NOT pursue to meet its financial needs?

Issuing corporate bonds.

A company values its inventory by assuming that the most recently produced items are sold first. This inventory valuation method is known as ___.

LIFO

Managers of publicly traded corporations are often compensated at least in part based on firm profitability, and bondholders prefer to receive principal and interest payments on time. Leverage can increase firm profitability and make more money available for interest and principal payments, so it appears that mangers' interests and bondholders' interests are well-aligned. Which of the following is true about conflicts between managers and bondholders?

Managers may under invest in projects if it appears that all proceeds will be absorbed by bondholders, hurting both shareholders and bondholders.

You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects?

Modified Internal Rate of Return.

Under the present value concept, a lottery winner would rather receive:

None of these, as the best answer depends on the interest rate that the lottery winner faces.

The net present value can be:

Positive, Zero, or Negative

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $11.0 million. Investment A will generate $2.40 million per year​ (starting at the end of the first​ year) in perpetuity. Investment B will generate $1.70 million at the end of the first​ year, and its revenues will grow at 3.2% per year for every year after that. Which investment has the higher IRR​? Which investment has the higher NPV when the cost of capital is 8.1%​? Which investment should you select?

Project A had the higher IRR, project B has the higher NPV. Select project B with the higher NPV. IRR can only be used to compare projects with equal initial investments.

Which of the following repurchasing method definitions is NOT correct?

Repurchase Put Rights: The firm announces that it will repurchase a number of shares at a set price

Which of the following actions would increase a company's operating leverage?

Reworking a compay's production process so it relied more on machinery and less on workers.

Which of the following statements regarding the cash conversion cycle (CCC) is correct?

Rising cash conversion cycle often indicates deterioration in cash flows, while declining cash conversion cycle generally signals improving cash flows.

Which of the following is a benefit shareholders can obtain by repurchasing its shares?

Shareholders have a higher percent ownership in the company at a higher per share price.

The following journal entry would account for which of the following transactions? Dr. Retained earnings Cr. Common stock Cr. Paid-in capital

Stock dividends

Which of the following statements regarding what dividends can mean to prospective investors is true?

Stocks with consistently high dividends tend to mitigate agency conflicts between investors and firm management

Which of the following should a company ALWAYS do with regards to its collection policy?

Tailor its collection policy based on each customer's needs and importance.

Which of the following is NOT a limitation of section 179?

Taxpayers must make the section 179 election if it put property into service that qualifies.

Which of the following statements regarding the cash conversion cycle is correct?

The cash conversion cycle can be shortened by delaying payments to suppliers.

Which of the following criteria is NOT taken into consideration when analyzing a possible replacement project?

The cash flows the current project has generated in the past.

A company is analyzing a variety of potential investments using different capital budgeting methods. Which of the following represents the most profitable choice based on the information provided?

The company picks a project with profitability index of 1.25 over a project with a PI of -.25.

If potential creditors and investors sense that a company has a higher risk of going bankrupt, which of the following will occur?

The company will be charged a higher interest rate by potential lenders.

A firm is trying to choose the most profitable project to invest in. Which of the following should be used as the company's discount rate?

The company's reinvestment rate or weighted average cost of capital.

A firm is trying to choose the most profitable project to invest in. Which of the following should be used as the company's discount rate?

The company's reinvestment rate.

Which of the following is an accurate description of one of the dates related to issuing dividends.

The declaration date is the day the board of directors announces it will pay a dividend.

Under the internal rate of return rule in capital budgeting, which of the following statements does not apply?

The internal rate of return can vary throughout the life of a project.

Which of the following is a correct definition of a capital budgeting method?

The internal rate of return is the discount rate that gives a net present value of zero.

In which of the following situations would a shareholder prefer to receive stock dividends as opposed to cash dividends?

The investor is looking to own shares in the company for a long period of time.

Which of the following statements about the marginal cost of capital is NOT true?

The marginal cost of capital is the weighted average of a company's cost of raising its capital.

The tax rate that applies to the last dollar of the tax base and is often applied to the change in one's tax obligation as income rises is called _____.

The marginal tax rate

Which of the following disadvantages of the payback method can be rectified?

The payback method does not account for the time value of money.

Under the Pecking Order Theory, what is the order of funding sources to finance a project from the most preferred method to least desirable?

Use capital reserves; issue debt; sell equity.

A company values its inventory by dividing the total cost of goods available for sale by the sum of the beginning inventory balance and the total amount of purchases made during the period. This method is known as ___.

Weighted Average Cost.

Which of the following shows a capital structure shift and a way to interpret that shift as a signal to investors?

When a company takes on debt, it signals that the company has strong solvency and good prospects.

Which of the following is NOT something that can be assumed about a stock based on a dividend announcement?

When a company's dividends steadily grown, this confirms the financial strength of the company.

If a company has yet to receive payment for its goods, which of the following describes a situation when it can recognize revenue from the sale?

When the goods have been delivered and the title has been transferred to the buyer.

A company uses ABC analysis to manage its inventory and it has just adopted a new product. While this new product is an important part of the company's sales, it is relatively cheap to manufacture and is not prone to expiring. It should be ___.

a B item.

Under the Modigliani-Miller theorem in finance, the value of a company depends on:

the competitive situation of the company and the projects that the company undertakes and plans.

Under the best capital structure of a company, the goal of it is to maximize:

the market value of the company.

Which of the following is a function of corporate capital budgeting?

All of these answers.

Which of the following is not a component included in a cash budget?

Depreciation expense.

A company is in dire financial straits. It has significant debts and no steady income or property. What should it do?

Take no action.

Which of the following is NOT a window of opportunity?

You plan on spending the next month shopping for a car.