Finance Modules 13-21

A company wants to implement a capital growth policy. In the current year it had $10 million in net income. How much income should it distribute in dividends?

$1 million

A company has $20,000 in cash, $10,000 in accounts receivable and $45,000 in fixed assets. It has $12,5000 in accounts payable. It owes $50,000 in two years on a note that has an annual interest payment of $5,000. What is its working capital?

$12,500

A company has $350,000 in accounts receivable, $100,000 in current inventory, and $125,000 in accounts payable. What is its working capital?

$325,000

A company issues an option that can only be exercised prior to expiration on three specific days that are defined in the contract. What type of option is this?

A Bermudan option.

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

A CCC is the number of days from the purchase of materials until the customer pays for the product. A company's return on capital is income divided by the capital used to earn that revenue. Credit policy is how a company uses credit to make purchases and whether it allows sales on credit.

Which of the following strategies is a valid way to execute an acquisition of another company?

A company exchanges its stock for shares in the company it wants to acquire. A company uses the cash it has on hand to acquire all of the assets of a target company A company sells its own stock for cash, which it then uses to buy the shares of the target company.

Which of the following is a reason a company may divest one of its subsidiaries?

A company may divest a division that is not focused on its core competencies. A company's parts may be worth more than the company as a whole. A company could be required by regulatory authorities to sell off some of its assets.

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.

Which of the following statements regarding popular exchange risk hedges is correct?

A futures contract is a standardized forward contract. A foreign exchange swap consists of a spot exchange and a forward foreign exchange. If a company is going to receive foreign currency, it will "short" a forward currency contract.

To reduce the number of failed mergers and acquisitions, what is often linked to the due diligence process?

A shareholder value analysis.

Which of the following is a correct definition of an exchange rate?

A spot rate is a contract where currency is exchanged approximately two days after the trade. A forward rate is a contract where currency is exchanged at some point in the future. The forward rate is a function of the spot rate, the time until settlement, and a growth rate.

Which definition best describes the term intellectual property?

Any product of someone's intellect that has commercial value: copyrights, patents, trademarks, and trade secrets.

Which of the following is NOT a role an investment bank can play in a merger or acquisition?

Audit the businesses prior to the merger.

Suppose Apple builds a plant in Taiwan and agrees to take 30% of the plant's output as partial payment for the contract. This is called:

Buyback

Which of the following correctly defines one of the "Five C's of Credit?"

Character: Is the borrower trustworthy with a history of meeting its debt obligations?

A security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay is known in finance as:

Collateral

Which of the following is NOT a benefit of contract manufacturing?

Complete control of production

Which of the following is NOT an advantage of international licensing?

Complete control over manufacturing

Which of the following stipulations is NOT a part of the typical franchise relationship?

Contracts are renewable at the option of the franchisee

Which of the following is NOT an advantage for an issuer of using convertible bonds?

Convertible bonds increases a company's liquidity.

The rate of return that capital could be expected to earn in an alternative investment of equivalent risk. This is the definition of:

Cost of capital.

The examination of a potential target for merger, acquisition, privatization, or a similar corporate finance transaction in finance is known as:

Due diligence

What are the main roles of investment banks?

Establish fair value for the companies involved in mergers and acquisitions. Introduce new securities to market in order to finance M&A activity. Studying the market themselves and approaching companies with their own strategic ideas.

Which of the following correctly defines a source of funds available to international businesses?

Eurobonds are international bonds denominated in a currency not native to the country where issued. Export-Import banks provide direct loans to foreign buyers of imports and intermediary loans. An international business is permitted to issue some of its shares in foreign markets.

What steps are involved in the due diligence process?

Financial audit Compatibility audit Macro-environment audit

A company might put money in FDI because:

High return Cheap labor Tax advantage

How does a country improve its welfare through imports?

Importing high quality goods at a lower cost

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

It can be used immediately to perform economic actions, such as paying outstanding debts. It allows the company to meet its obligations without incurring avoidable losses. It increases a company's liquidity.

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?

It should review its past sales data to determine the pattern of demand for its goods. It should calculate the lag time in its supply chain. It should analyze its cash flow so it has enough cash to purchase its stock.

The Selling of the assets of a business as part of the process of dissolving the business in finance is known as:

Liquidation

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

More money is being reinvested by the company in new products, .increasing its overall value You Answered It could lead to lower taxes in the long-run for the shareholder. A low dividend yield may indicate that the firm is experience rapid growth.

Which of the following statements regarding venture capital is correct?

Most venture capital investments are done with pooled investment vehicles.

Expanding the value chain to efficiently capture value in global markets, particularly in regards to sourcing, is a central component of which global challenge?

Organizational structure

Which of the following correctly defines a method used to value a company's securities?

Present value determines a company's stock price using the firm's projected cash flows. A company's net asset value equals the market value of a company's assets minus its liabilities. Comparable company analysis determines a firm's value by observing the prices of similar companies.

What firms provide funds for companies unable or uninterested in obtaining funds publicly?

Private Equity

One of the downsides of outsourcing for a company is that it:

Reduces confidentiality

Which of the following is included in the due diligence process prior to a merger?

Review the target company's insurance and liability coverage. Completing a compatibility audit. Performing a combination of valuation methods.

A company is concerned that the value of its accounts receivable from overseas will decrease due to a shift in exchange rate. What type of exchange exposure is the company concerned about?

Short-run exposure.

Which of the following correctly describes a method companies can use to analyze their collections?

The account receivable days is the average number of days it takes a firm to collect on its sales. The receivable turnover ratio measures the number of times, on average, receivables are collected. An aging schedule categorizes accounts by the number of days they have been on the books.

Which answer best describes the term London Interbank Offered Rate?

The average interest rate estimated by leading financial institutions in London that they would be charged if borrowing from others.

Which of the following statement regarding stock "spread" is correct?

The bid-offer spread is the difference between the prices quoted for sale and for purchase.

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 is NOT a benefit associated with a company initiating an Initial Public Offering (IPO)?

The company is guaranteed to raise additional capital necessary to expand its business.

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.

Which of the following is a correct definition of a feature of convertible bonds?

The conversion ratio is the number of shares each convertible bond converts into.

Which of the following circumstances might influence a business not to invest in a specific foreign country?

The country's currency is susceptible to high inflation. The country's laws provide inadequate protection for intellectual property. The country's neighbors have lower inflation rates.

What happens if the borrower defaults on paying back a secured loan, and the sale of the collateral is not enough to pay back the remainder of the loan?

The creditor obtains a defficiency judgement

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.

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

The distinction between "current" and "non-current" is arbitrary. Cash flows available for paying current liabilities may be closely related to long-term assets. Many businesses are complex, making it difficult to determine the length of the operating cycle.

WIPO Headquarters is best known as a:

The headquarters for the World Intellectual Property Organization in Geneva, Switzerland.

Which of the following is a reason for completing a merger that would not necessarily lead to increasing shareholder value?

The merger allows the strength of one company to compensate for the weakness of the other.

Which of the following changes after a stock splits?

The stock's per share price.

Which of the following factors influences the value of an option?

The strike price of the option. The cost of holding a position in the underlying security, including interest and dividends. The time until expiration

Which term best describes the term working capital?

The total available cash and cash equivalents after subtracting current liabilities from current assets.

Which of the following statements describe the role of underwriters?

The underwriter minimizes the risk to company that is issuing stock. The underwriter sells a company's IPO shares to the market at large. The underwriter determines at what price a company's IPO shares will sell .

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?

There is information asymmetry between the company's managers and its investors. Financial leverage does affect a company's cost of capital. There are transaction costs associated with trading stock.

The one reason MNC can be harmful for the host country is:

They obtain strong negotiating power with local government

The process of the invoice being received by the purchaser, then matched to the packing slip and ultimately paid is referred to as:

Three-way match

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

To ensure that the company can meet known financial requirements, such as maturing bond issues. To serve as a substitute for cash balances. To obtain a return instead of letting the funds remain idle.

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

To prevent the stock from being delisted from a stock exchange. You Answered To encourage institutional investors and mutual funds to purchase the stock. To decrease the number of its shareholders.

Which of the following is a way derivatives are used by investors?

To provide leverage. To speculate and make a profit. To obtain exposure to the underlying where it is not possible to trade in the underlying.

Federal estimates suggest that the average American household has $5,700 in credit card debt.

True.

Which of the following is NOT a way warrants differ from options?

Unlike options, warrants have different exercise types, such as American and European style.

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.

Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are considerable is known in finance as:

Venture capital

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.

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

When a dividend paying stock's price falls, it may reflect investor fears of a dividend cut. High-yield stock tend to outperform low and no yield stocks during bear markets. Generally speaking, most firms that pay high dividends are mature, profitable, and stable.

In national accounts, an export of a good in most cases is best defined as:

When there is a change of ownership from a resident to a non-resident

A customer has 45 days from the date of invoice to pay a bill in full, but if he pays within 15 days of the invoice, he gets a 10% discount. Which of the following describes these terms of trade?

10/15, net 45.

A company has $2 million in machinery expenses and $3 million in rent. It costs $30 per unit in labor costs to produce the good, which is sold for $50 per unit. What is the break even point?

250,000 units

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

30%-50%

A company has average inventory of $10 million and COGS of $15 million. Its average accounts receivable is $1 million and it had $3 million in credit sales. Its average accounts payable is $1.5 million and it had $10 million in purchases. What is its CCC?

310.25

A company has a holding cost per unit of $5. Each order has a fixed cost of $8 and the annual demand quantity is 150,000 units. What is the company's optimal order quantity?

693 units

Which answer best describes the term money market:

A market for trading short-term debt instruments, such as treasury bills, commercial paper, bankers' acceptances, and certificates of deposit.

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

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

Which of the following correctly defines a type of derivative?

A swap is a contract where counterparties exchange cash flows of each party's finanical instrument.

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.

What happens when an overdraft occurs and the positive balance exceeds the agreed terms?

Additional fees may be charged

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

Agency costs. Information asymmetry between the company's management and its investors. Bankruptcy costs.

Which of the following is a characteristic of an operating lease?

At the end of the lease, the company has the opportunity to purchase the asset at its market value.

What answer best describes liquidity?

Availability of cash over short term: ability to service short-term debt.

Which of the following is the main advantage for a company to go public?

By being publicly traded, the company has greater access to capital.

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

Cash management balances having enough cash for expenses while minimizing cash holding costs. Inventory management ensures uninterrupted production while minimizing investment in raw materials. Debtors management finds the appropriate credit policy.

What is included in the Cash Conversion Cycle?

Cash, Raw materials, Finished goods, and Receivables.

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

Cash. Securities of other companies. Stock.

An individual files 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 is not a component included in a cash budget?

Depreciation expense.

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?

Dividends paid to shareholders are not tax deductible. You Answered The cost of capital decreases as the proportion of debt in the capital structure increases. Interest payments on debt is tax deductible.

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

Dividends provide consistent returns on relatively low risk investments.

Which of the following statements correctly defines a source of capital?

Equity financing occurs when a company sells some of its stock to investors.

A financial transaction whereby a business sells its accounts receivable to a third party at a discount is know in finance as:

Factoring

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

Financing management.

What are some of the tasks investment banks undertake when they advise companies?

Find companies that might be interested in acquiring the business. Prepare the company's pitch book. Negotiate the terms of the acquisition between the acquiring and acquired business.

Which of the following statements regarding float is correct?

Float represents duplicate money that exists during the time between when a check is deposited and when that amount is withdrawn from the sender's account.I

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 is a reason a public company might decide to go private?

Generally private companies are owned by the managers, which incentivizes them to improve performance. Private investors can offer expert knowledge and oversight, where public investors generally cannot. Privately financed companies generally have lower administrative costs.

Which of the following statements regarding refinancing risk is correct?

Generally, liabilities should be self-liquidating.

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

In pecking theory, internal financing is superior to debt which is superior to selling more equity. The pecking order theory argues that when a company sells its shares, that is a negative signal. Some academics have demonstrated that pecking theory fails when applied to small firms.

Which of the following is NOT an expense that can be decreased by a company through leasing?

Interest expense.

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

Investors lost due to a dividend policy shift are often offset by new investors who like the shift. You Answered The content of a company's dividend policy is not as important as whether it is stable. Investors may keep shares that don't reflect their dividend preferences due to reinvestment costs.

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

LIFO

What is an advantage of convertibles?

Lower fixed-rate borrowing costs. Locking into low fixed-rate long-term borrowing. Increasing the total level of debt gearing.

Which of the following defines the role of a market maker?

Market makers quote both ask and bid prices for certain securities.

A company has developed a successful strategy and its sales are steadily increasing despite an increase in competition. Which of the following types of financing should the company consider?

Obtain funds from a Venture Capitalist. Pursue equity financing. Offer its stock to the general public on a security exchange.

When a lender provides a short-term unsecured loan to be repaid at the borrower's next pay day, it is called:

Payday loan

Which is NOT an example of an asset?

Personal debt

Derivatives are used to minimize what type of risk?

Price risk.

Which of the following statements regarding how companies use long-term debt is correct?

Riskier businesses are required to pay higher interest rates. Most corporate bonds are fixed-rate bonds. From a tax perspective, debt financing have some advantages over equity financing.

What is the difference between secured and unsecured loans?

Secured loans are backed by a form of collateral.

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.

Stock that is bought back by the issuing company, reducing the amount of outstanding stock on the open market in finance is know as:

Shares In Treasury

Which of the following statements regarding shelf registration is true?

Shelf registration allows a company to sell securities without a separate prospectus for each offering.

Which of the following is NOT an advantage of person to person lending?

Simple compliance to legal regulations

Which answer best describes the term asset?

Something of economic value.

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.

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 answer best describes a portfolio?

The group of investments and other assets held by an investor.

The greatest value of credit cards to merchants is:

The issuing bank commits to payment

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

The number of days it takes a business to obtain payment from its customers for its completed sales. The level of inventory necessary to ensure that a company can meet its customers demands. The number of days the company can wait before it must pay its debts.

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

Whether the company pays dividends at all. Whether dividends are paid out in cash or stock. How often the company pays dividends.

Which of the following is NOT a window of opportunity?

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

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.

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.

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.

When a company has begun the manufacturing process on a good, but it is not yet complete, that item is placed in _____.

work in process inventory.