Financial Strategy quiz questions

Firm X announces that they are going to acquire Firm Y. Immediately following this announcement, the stock price for Firm X drops by 7% and the price for Firm Y rises by 28%. Based on this, it is reasonable to conclude

Firm X is making a bad acquisition because the stock price declined when investors were made aware of the acquisition

Which of the following actions would be consistent with risk aversion (check all that apply)

I am offered an opportunity to flip a fair coin. The flip will cost me $1 and pay $2.50 for heads and $0 for tails. I take the coin flip.

Check all the following statements that are correct

If our firm changes the collection policy to our customers (for example, moving from giving them 20 days to pay to giving them 33 days to pay), our AFN estimates need to be adjusted. Forecasting the appropriate growth in sales is critical in determining the AFN in a given year

Which of the following is NOT part of the financial plan? (check all that apply)

Mission Statement

DuPont Analysis provides a framework for breaking down the Return on Equity into 3 categories. These 3 categories are

Net Profit Margin, Total Asset Turnover, and Equity Multiplier

A common size balance sheet is calculated by expressing each line item of the balance sheet as a percentage of sales (or revenues). t or f

false

According to risk aversion, investors will always choose the investment alternative that has the lowest level of risk. T or F

false

All else equal, increasing the Days Sales Outstanding Ratio is seen as a positive sign. t or f

false

All else equal, the greater the proportion of spontaneous assets to spontaneous liabilities, the greater the self-sustaining growth rate should be. t or f

false

All else equal, the higher the profit margin the more additional funds are needed. t or f

false

One of the key factors of success for a firm is being able to take advantage of consumers and suppliers through market power. If we can become the dominant player in the industry, we can force suppliers to meet our demands and we can raise prices on consumers (increasing margins) as they have no reasonable alternatives for our products. t or f

false

Risk aversion and risk minimization are the same thing. t or f

false

The primary goal of financial management is to maximize profits. T or F

false

The primary goal of financial management is to maximize profits? t or f

false

When considering our sales growth for the next few years, our past sales growth should be the primary input tool. t or f

false

When focusing on maximizing shareholder wealth, we do this by minimizing our costs. t or f

false

Advantages of corporations include (check all that apply)

limited liability, limited access to capital

A common size income statement is calculated by stating all line items in the income statement as a percentage of sales (or revenues). t or f

true

All else equal, an increase in the Inventory Turnover Ratio is seen as a positive sign. t or f

true

All else equal, the greater the capital intensity (Assets/Sales) the more additional funds are needed. t or f

true

All else equal, the greater the production opportunities in the economy, the greater we would expect interest rates to be.

true

All else equal, the greater the production opportunities in the economy, the greater we would expect interest rates to be. t or f

true

All else equal, we expect the cash flow from investing activities to be negative. t or f

true

If companies experience excess capacity or economies of scale, long-term assets will likely grow at a rate that is less than proportional to sales. t or f

true

Management should treat calculations for additional funds needed as more of a guideline than an absolute. t or f

true

Of the three categories in which we can break down the Return on Equity using DuPont analysis, the area that provides us the least confidence in the companies long-term profitability is the equity multiplier. t or f

true

One of the key factors associated with successful firms is strong relationships with groups outside the company. This includes outside stakeholders such as suppliers, customers, and the communities in which the firm operates. t or f

true

Our firm is likely to need to look for additional financing when spontaneously generated assets rise significantly more than spontaneously generated liabilities and retained earnings. t or f

true

While we often assume that certain assets and liabilities will increase/decrease proportionately with sales, in practice the relationship is rarely smooth. t or f

true

The balance sheet is likely to

understate the true value of the firm's assets because it ignores many of the firm's intangible assets (patents, copyrights, brand name, R&D, etc.)

All else equal, the higher the profit margin the more additional funds are needed. t o f

False

Assume the following information: Accounts Receivable ==> $40 Inventory ==> $50 Cash and Mkt. Securities ==> $25 Property, Plant and Equipment (Net) ==> $60 Short-term Investments ==> $30 Accounts Payable ==> $60 Short-term Debt ==> $20 Current sales level ==> $200 Forecasts sales level ==> $220 Dividend Payout Ratio ==> 40% Profit Margin ==> 5% Based on this information, calculate the additional funds needed

$4.90 Spontaneous Assets = $40 + $50 + $25 + $60 = $175 *Note that ST Investments are not related to sales, so not part of spontaneous assets Spontaneous Liabilities = $60 *Note that Short-term Debt is not related to sales, so is not part of spontaneous liabilities AFN = (175/200)*20 - (60/200)*20 - 220*.05*(1-0.4) AFN = $17.50 - $6 - $6.60 AFN = $4.90

Assume the following information: Accounts Receivable ==> $60 Inventory ==> $100 Cash and Mkt. Securities ==> $30 Short-term Investments ==> $70 Property, Plant and Equipment (Net) ==> $110 Short-term Investments ==> $70 Accounts Payable ==> $140 Short-term Debt ==> $200 Current sales level ==> $400 Forecasts sales level ==> $450 Dividend Payout Ratio ==> 60% Profit Margin ==> 6% Based on this information, calculate the additional funds needed.

$9.20 Spontaneous Assets = $60 + $100 + $30 + $110 = $300 *Note that ST Investments are not related to sales, so not part of spontaneous assets Spontaneous Liabilities = $140 *Note that Short-term Debt is not related to sales, so is not part of spontaneous liabilities AFN = (300/400)*50 - (140/400)*50 - 450*0.06*(1 - 0.6) AFN = $37.50 - $17.50 - $10.80 AFN = $9.20

Your firm has the following information: Earnings Before Interest and Taxes (EBIT) -- $6,000 Tax Rate -- 30% Operating Current Assets -- $4000 Operating Current Liabilities -- $1300 Operating LT Assets -- $9500 Based on this, the Return on Invested Capital (ROIC) is

34.43% ROIC = NOPAT/TNOC NOPAT = EBIT(1-T) = $6,000(1-0.3) = $4200 TNOC = NWOC + Operating LT Assets = $4000 - $1300 + $9500 = $12,200 ROIC = $4200/$12200 = 34.43%

Your firm has reported Net Income of $5 million. The firm has assets of $20 million and liabilities of $6 million. Based on this, the firm has a Return on Equity of

35.7% The key to this question is to recognize that assets = liabilities + owner's equity. If assets are $20 million and liabilities are $6 million, that means that owners' equity is $14 million. Once we get that, ROE = Net Income/Owners' Equity = $5/$14 = 35.7%

Your firm has the following information: Earnings Before Interest and Taxes (EBIT) -- $5,000 Tax Rate -- 30% Operating Current Assets -- $3000 Operating Current Liabilities -- $1800 Operating LT Assets -- $7500 Based on this, the Return on Invested Capital (ROIC) is

40.23% ROIC = NOPAT/TNOC NOPAT = EBIT(1-T) = $5000(1-0.3) = $3500 TNOC = NWOC + Operating LT Assets = $3000 - $1800 + $7500 = $8700 ROIC = $3500/$8700 = 40.23%

rom August 2008 to March 2009, the US stock market lost approximately

50% of its value

Choose the correct statement regarding MVA (check all that apply)

A challenge in interpreting MVA is that it can be artificially enhanced by a strong stock market or hurt by a weak market that is outside management control, MVA is likely to do a better job of taking into account future expectations than EVA

All else equal, the higher the sales growth the more additional funds are needed. t or f

All else equal, the higher the sales growth the more additional funds are needed.

A CDS refers to a

Credit Default Swap

When forecasting sales, we should consider (check all that apply)

Current status of potential market and competition, Historical growth rates and volatility, Strategic initiatives

Disadvantages of corporations include

Double-Taxation, Greater Regulation

Choose the correct statement(s) regarding EVA (check all that apply)

EVA focuses on a measure of a firm's value creation that is less tied to stock price than the MVA measure, If a firm continually reports negative values for EVA, that is evidence that the firm is doing a poor job of creating value, Estimating EVA requires an estimate of our cost of capital (WACC)

Which of the following are included in the key factors of success for businesses (check all that may apply)

Enough funding to execute plans and support operations, skilled people

A key component of the financial plan is a development of corporate objectives. t or f

False

Which of the following is NOT one of the factors influencing the cost of money?

Past inflation

Which of the following are likely to increase in a relatively proportional manner with sales? Check all that apply. Ignore excess capacity and economies of scale issues.

Property, Plant & Equipment, inventory

Which of the following is consistent with the firm's primary goal?

Pursuing policies that increase the value of the firm's stock price over the long-run

This type of security represents a claim against the cash flows generated from a bunch of other securities. A CDO (Collaterized Debt Obligation) would be an example of this type of instrument.

Securitized Instrument

The three factors for maximizing shareholder wealth include

The magnitude, timeliness and riskiness of expected cash flows

Sole proprietorships and partnerships have more in common than partnerships and corporations. T or F

True

The income statement

Uses an accrual based system instead of a cash based system to identify income