Finance Pre-Test

Freedom Rock Bicycles has a sales capacity of $10 million. When sales exceed this capacity, the company must invest $200,000 in new equipment. Freedom Rock Bicycles had sales of $9 million in one year, and it projects a sales growth of 10%. The net fixed assets in the year were $500,000. By how much will the company's discretionary financing need increase? A. $0 B. $50,000 C. $200,000 D. $900,000

$0

Which cash flow of a particular project would be a sunk cost? A. $20,000 market value of equipment at the end of the project B. $35,000 incremental cash flows for the third year of the project C. $50,000 marketing study conducted three months ago for the project D. $100,000 initial investment for the project

$50,000 marketing study conducted three months ago for the project

Maria is planning to invest in some company stocks for retirement and is trying to figure out if the stocks are a good buy. She calculates the intrinsic value of one of the stocks, Quiet Flag Industries, to be $35. The stock is currently trading on the market for $30, so she decides to buy it. Why was it a good idea for Maria to buy this stock? A. The stock's intrinsic value is greater than 1. B. The stock is overvalued. C. The stock's intrinsic value is less than its actual value. D. The stock is undervalued.

The stock is undervalued.

Which process is Li engaging in if he recently made a personal budget and is now keeping a record of his cash flows? A. Forecasting B. Monitoring C. Revising D. Tracking

Tracking

As an active investor, Maria is analyzing her portfolio to decide if there are any stocks she should remove from her pool of financial securities. A company she has invested in, Quiet Flag Industries, just released its annual report. Which kind of method should Maria use to see if the company has improved? A. Trend analysis B. Focus analysis C. Progress measurement D. Cross-sectional analysis

Trend analysis

Which type of expense is a magazine subscription? A. Monitored expense B. Variable expense C. Fixed expense D. Asset expense

Variable expense

The lowest rate of return is required by which type of investor or lender? A. Bank B. Preferred stockholder C. Common stockholder D. Bondholder

Bank

A pharmaceutical company recently spent $2 million developing a new drug. The company then conducts capital budgeting analysis to determine if it should produce the newly developed drug. The net present value (NPV) of the project is $1.5 million. Why should this company produce the drug? A. Because the NPV is greater than zero B. Because the development costs are greater than the value of the project C. Because the losses due to cannibalization are less than the value of the project D. Because the project will provide a total value of $3.5 million to the company

Because the NPV is greater than zero

What is the process of analyzing financial data with ratios to compare a firm's performance to competitors? A. Valuing B. Benchmarking C. Auditing D. Evaluating

Benchmarking

How do bond payments to investors differ from stock payments to investors? A. Bond payments are larger than stock payments. B. Stock payments have a shorter duration than bond payments. C. Stock payments are fixed, and bond payments are variable. D. Bond payments are fixed, and stock payments are variable.

Bond payments are fixed, and stock payments are variable.

An investor really cares about having voting rights in a firm. Which type of financial security should this investor purchase? A. Common stock B. Preferred stock C. Secured bonds D. Zero-coupon bonds

Common stock

An investor is reviewing the bonds of four different companies: Company A issues AA-rated bonds. Company B issues A-rated bonds. Company C issues BB-rated bonds. Company D issues C-rated bonds. Which company is likely to provide the lowest rate of return to the investor? A. Company A B. Company B C. Company C D. Company D

Company A

Based on the information in the chart below, what can you conclude about Company A's ability to collect its accounts receivable (AR)? Entity/ Percentage of Sales on Credit/AR Turnover/AR Collection Period Industry (30%/12 /30.42) Company A (30% /7 / 52.14) A. Company A collects its accounts receivable in a highly variable pattern compared to the industry. B. Company A is more efficient at collecting its accounts receivable than the industry. C. Company A is less efficient at collecting its accounts receivable than the industry. D. Company A collects its accounts receivable just as quickly as the average of other firms in the industry. 25

Company A is less efficient at collecting its accounts receivable than the industry.

Why can compounding interest be a good tool but also a significant detriment? A. Compounding interest can be a good tool to understand the time value of money, but it is a detriment because it does not take inflation into account. B. Compounding interest can be a good tool because it summarizes the required return, but it is a detriment because it requires a larger cost of capital. C. Compounding interest can be a good tool to understand opportunity cost, but it is a detriment because it does not take D. Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest.

Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest.

Which ratio helps an analyst evaluate whether a company can cover its short-term obligations? A. Current ratio B. Market-to-book ratio C. Return on equity D. Net margin

Current ratio

What is the effect of debt financing on a firm's income? A. Debt interest payments have no effect on taxable income. B. Income is taxed at a lower rate when a firm has more debt. C. Income is taxed at a lower rate when a firm has no debt. D. Debt interest payments reduce taxable income.

Debt interest payments reduce taxable income.

What would profitability index (PI) be useful for? A. Computing the future value of a project in the future rather than the present value B. Deciding between projects that are mutually exclusive C. Calculating returns for a project that does not have a definite return rate for IRR or NPV D. Determining whether a firm should invest in projects with different initial outlays

Determining whether a firm should invest in projects with different initial outlays

Which tool is forward-looking and thus helps decision makers understand how actions taken today can affect their firm's future performance? A. Ratio analysis B. Financial forecasting C. Financial statements D. Accounting

Financial forecasting

A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company's assets are increasing significantly, what else must increase? A. Profit turnover B. Financing C. Gross margin D. Accounts receivable turnover

Financing

Which principle of ratio analysis means that ratios are open for analyst interpretation, are not governed by rules, and allow creativity to work according to a particular company or asset? A. Flexibility B. Focus C. Evaluation D. Standardization

Flexibility

Which action will increase the return on equity of a firm? A. Decreasing the profitability of the firm B. Increasing the asset usage efficiency of the firm C. Increasing the liquidity of the firm D. Decreasing the debt financing of the firm 24

Increasing the asset usage efficiency of the firm

How is inflation calculated? A. Inflation is calculated by determining the rate at which the demand for particular goods and services has increased over a period of time in an economy. B. Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy. C. Inflation is built into the economy and will rise as employees receive salary raises. D. Inflation is determined by the federal government at a target rate of 2% a year.

Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy.

Which type of ratios are banks and lenders most concerned about? A. Efficiency B. Activity C. Profitability D. Liquidity

Liquidity

Jack works for a company that manufactures televisions and must obtain financing to increase the company's inventory levels. Jack's manager knows that current investment markets are tight, and it may be difficult for the company to obtain additional financing for the next year. The manager asks Jack to propose a way for the firm to reduce its discretionary financing needed (DFN). What should Jack suggest to reduce next year's DFN? A. Increase sales growth, resulting in a larger amount of revenue coming into the firm B. Lower the net margin by decreasing the sales prices and maintaining current costs C. Increase the amount spent on fixed assets to increase production capacity D. Lower the amount of dividends that are paid out to shareholders next year

Lower the amount of dividends that are paid out to shareholders next year

A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of? A. Making investment decisions B. Making financing decisions C. Managing interdepartmental loans D. Managing working capital

Making financing decisions

are financial models helpful in financial forecasting? A. Models provide credibility to a firm's financial statements for government agencies to review. B. Models show the future supply schedule for a firm, which allows for negotiation with suppliers. C. Models allow users to see the complex relationships between sales and other aspects of the business. D. Models are required by the SEC when a firm plans to issue additional stock on the public market.

Models allow users to see the complex relationships between sales and other aspects of the business.

Suppose an individual does not eat chocolate because eating chocolate goes against his personal beliefs. Which type of standard is this? A.Legal B. Moral C. Ethical D. Financial

Moral

What is the term for an individual's beliefs concerning what is and is not acceptable to personally do? A. Laws B. Ethics C. Honesty D. Morals

Morals

A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year? A. No, because the increase in sales will exceed the firm's sales capacity. B. Yes, because the increase in sales will exceed the firm's sales capacity. C. Yes, because the increase in sales will not exceed the firm's sales capacity. D. No, because the increase in sales will not exceed the firm's sales capacity.

No, because the increase in sales will not exceed the firm's sales capacity.

Which component of the required rate of return takes into account the loss of potential gain from other alternatives? A. Opportunity cost B. Hurdle rate C. Inflation D. Risk

Opportunity cost

Which method is most commonly used for determining a company's DFN? A. Company multiples B. Historical regression C. Percent of sales D. Sustainable growth rate

Percent of sales

A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? A. Standardization B. Assessment of future needs C. Corrective action D. Performance evaluation

Performance evaluation

A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? A. Primary market B. Secondary market C. Money market D. Efficient market

Primary market

Which type of ratio should be used to examine the cost efficiency of a firm's production? A. Liquidity B. Profitability C. Efficiency D. Market

Profitability

What is the relationship between risk and return? A. The lower risk an investor takes, the higher return the investor expects to receive. B. The higher risk an investor takes, the higher return the investor expects to receive. C. The higher risk an investor takes, the slower the investor expects to receive a return. D. The lower risk an investor takes, the faster the investor expects to receive a return.

The higher risk an investor takes, the higher return the investor expects to receive.

In which way is accounting different from finance? A. Accounting forecasts future performance, given the past, while finance records past performance. B. Accounting is focused on allocating capital, while finance is focused on bringing in capital. C. Accounting is about budgeting, saving, and borrowing, while finance is about investing, forecasting, and lending. D. Accounting is backward looking, while finance is focused on the future.

Accounting is backward looking, while finance is focused on the future.

Which action is based upon moral standards? A. As mandated by government regulations, a financial manager files a registration statement with the U.S. Securities and Exchange Commission (SEC) before offering equity securities for sale. B. As outlined in the company's policies, a financial manager hires a third-party entity to review all annual report filings to ensure they are compliant with applicable generally accepted accounting principles (GAAP). C. Although there is no company policy regarding it, a financial manager chooses not to accept gifts from the company's clients to ensure that she does not create a conflict of interest. D. Since it is generally accepted in the company that no personal information about clients should be released without written permission, a financial manager denies the request for a third party to access its data.

Although there is no company policy regarding it, a financial manager chooses not to accept gifts from the company's clients to ensure that she does not create a conflict of interest.

How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy? A. By insuring deposits in investment accounts up to $250,000 to promote public confidence B. By accepting deposits of money, paying interest on deposits, and providing loans to individuals and organizations C. By providing individuals and firms access to financial markets to buy or sell financial securities D. By raising capital on a contractual basis, such as an insurance contract

By providing individuals and firms access to financial markets to buy or sell financial securities

Which term refers to the metrics and calculations that use tools such as net present value (NPV), internal rate of return (IRR), and profitability index (PI) to evaluate investments? A. Projected financing criteria B. Security analysis criteria C. Accounting investment criteria D. Capital budgeting criteria

Capital budgeting criteria

What are the benefits of using the traditional envelope method to track cash flows? A.It requires users to carefully track specific expenses and write down their income and spending for the month. B. It is simple and helps ensure that users do not spend more than the cash that they have available. C. It enables users to connect bank and credit card accounts to automatically update income and expenses. D.It automatically separates expenses into categories so users can quickly assess their purchases during the month.

It is simple and helps ensure that users do not spend more than the cash that they have available.

How is the cost of capital used in the decision-making process for a capital investment project? A. It is compared to the NPV. B. It is part of the initial investment. C. It is input into cash flow calculations. D. It is used as the discount rate of cash flows.

It is used as the discount rate of cash flows.

How does an analyst use the hurdle rate? A. It is used to compare with the IRR to determine whether a project should be accepted. B. It is used with the IRR as a method to find the required payment amount for a project. C. It is used to determine the time frame of a project. D. It is used to calculate the IRR for a project and determine its value.

It is used to compare with the IRR to determine whether a project should be accepted.

How can investing help a person reach personal financial goals? A. It provides a guaranteed future outcome in order to predictably meet financial goals. B. It provides access to potential revenue or increases in value to help meet goals faster. C. It helps a person understand how money was spent previously in order to reliably predict future expenses. D. It ensures money is placed in a safe, risk-free, and easily accessible financial asset.

It provides access to potential revenue or increases in value to help meet goals faster.

Which type of economic indicator changes after the economy changes and helps identify trends in the long term? A. Leading indicator B. Lagging indicator C. Coincident indicator D. Yield curve indicator

Lagging indicator

Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn? A. Leading indicator B. Lagging indicator C. Coincident indicator D. Correlated indicator

Leading indicator

An employee was recently hired as a financial analyst and asked to create a cash budget for the employee's division for the next year. Which component should the employee exclude from the budget? A. Payments to suppliers that will be made over the next six months B. Purchase of equipment that will be bought in three years C. Payment toward the line of credit that is due next month D. Purchase of inventory for sales that the employee will make this year

Purchase of equipment that will be bought in three years

An investment analyst is concerned about a construction company's ability to sell its inventory to meet current obligations, because much of the inventory (commercial buildings) it builds and sells takes longer than a year to construct. Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's ability to meet current obligations? A. Leverage ratio B. Current ratio C. Quick ratio D. Inventory ratio

Quick ratio

Maya is considering purchasing stock in a certain company. Her financial advisor suggests that she purchase stocks in multiple companies instead of just one. Which risk management technique is this financial advisor suggesting? A. Risk transfer B. Risk separation C. Risk diversification D. Risk avoidance

Risk diversification

An energy company discovers that a new bill has been proposed to change the amount of fuel that can be exported outside the country. If passed, this could have a serious negative effect on the company's revenues. Some of the company's competitors are obtaining insurance policies to compensate for this risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do nothing—ultimately taking responsibility for this particular risk instead of trying to transfer the risk through an insurance policy. Which risk management technique is this choice an example of? A. Risk retention B. Risk separation C. Risk avoidance D. Diversification

Risk retention

What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects? A. Separate owners from management so their interests do not conflict B. Encourage manipulation of accounting procedures to optimize the company's profit C. Release managers who do not attempt to maximize immediate shareholder value D. Set strict covenants that the company cannot uphold if it chooses a risky project

Set strict covenants that the company cannot uphold if it chooses a risky project

Based on the following information about the stocks of several companies, which stock displays the greatest amount of risk? Stock A: Return = 22.22%, Standard Deviation = 9.99% Stock B: Return = 15.05%, Standard Deviation = 7.35% Stock C: Return = 38.83%, Standard Deviation = 4.54% Stock D: Return = 5.69%, Standard Deviation = 5.32% A. Stock A B. Stock B C. Stock C D. Stock D

Stock A

What is the term for the rate that allows a firm to maintain its present financial ratios without issuing new equity or increasing debt? A. Capital growth rate B. Sustainable growth rate C. Steady state growth rate D. Sales growth rate

Sustainable growth rate

What is the main question that both individuals and companies must consider when making financial decisions to reach a goal? A. Will this decision require debt or equity financing? B. Will this decrease the amount of cash available? C. Will utility be maximized through this decision? D. Will the benefits of the action outweigh the costs?

Will the benefits of the action outweigh the costs?

Quiet Flag Industries has a large piece of land worth $250,000 that it is considering using for a miniature golf business. When evaluating the cash flows that would result from doing this project, should Quiet Flag consider the land value? Why or why not? A. Yes, the land value represents an opportunity cost. B. No, the land value represents an existing expense. C. Yes, the land value represents cannibalization. D. No, the land value represents a sunk cost.

Yes, the land value represents an opportunity cost.