D076 - Finance Skills for Managers Questions

Which NPV value indicates that the IRR has been reached? $99.99 $15.00 -$100.00 $0.00

$0.00 Correct! The IRR is the rate of return that makes the NPV of a project equal to zero.

Which account is a spontaneous account? Common stock Accounts payable Notes payable Long-term debt

Accounts payable Correct! Accounts payable is a spontaneous account that varies with sales.

Which phrase accurately depicts what interest rate risk is? An example of market risk because all bonds will react in the same direction to a change in rates An example of firm-specific risk because the value of a bond is determined by its maturity and coupon rate An example of market risk where the value of a bond is affected by changes in interest rates An example of firm-specific risk where the value of a bond is affected by changes in interest rates

An example of market risk where the value of a bond is affected by changes in interest rates Correct! This is the correct definition of interest rate risk.

What is the ratio that tells you on average how long it takes for a firm to collect accounts receivable? Average collection period Inventory turnover Accounts receivable turnover Fixed asset turnover

Average collection period Correct! The ACP tells how long on average it takes for a company to collect accounts receivable from its customers.

If a company expects sales to grow by 10% next year, which account might also increase by 10%? Training budget for senior employees Cost of goods sold Headquarters utilities General business insurance

Cost of goods sold Correct! Cost of goods sold is a spontaneous account, so if sales go up, you would expect the cost of goods sold to increase by a similar percentage. Otherwise, the company would not be able to sell products.

What does the sales capacity equation tell you? How much room a firm has to grow without additional investment in fixed assets The minimum amount of fixed assets required to support current sales The limit for a firm's sales growth How much the firm can grow without issuing new equity

How much room a firm has to grow without additional investment in fixed assets Correct! By using the ratio of actual sales to percent of capacity, you can determine how much sales growth the firm can support without needing to invest in further fixed assets.

Five years ago, Ahmed decided he was going to save up to purchase a car with cash. The car he wants is priced at $15,000. He saved $245 a month in an account that gave him enough interest to have $15,000 in five years. Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider? Inflation Risk Opportunity cost Interest rate

Inflation Correct! The price of the car simply went up by $1,562 due to inflation.

What does the risk-free rate indicate? Risk Opportunity cost and risk Inflation and risk Inflation and opportunity cost

Inflation and opportunity cost Correct! The risk-free rate includes inflation and opportunity cost.

What is the rate at which the average price level of particular goods and services in an economy increases over a period of time? Inflation rate Opportunity cost Real rate Nominal rate

Inflation rate Correct. The question stem is the definition of inflation rate.

What are the effects of attempting to maximize shareholder value for a business in an unethical way? It often leads to employing more workers and boosting the economy. It often gives the business an opportunity to improve its branding and reputation. It often leads to decreased shareholder value for the business. It often decreases vulnerability to long and expensive litigations.

It often leads to decreased shareholder value for the business. Correct! Unethical behavior can lead to very costly results.

What is a component of the DuPont framework? Return on assets Times interest earned Fixed asset turnover Current ratio

Return on assets Correct! ROE is ROA times leverage multiplier.

Which kind of projects are bondholders interested in? Safe projects with a higher chance of providing sufficient compensation Riskier projects that will provide higher returns Projects that allow the company the most freedom in how it spends money Riskier projects that will increase the value of the company's stocks and their own financial return

Safe projects with a higher chance of providing sufficient compensation Correct! Bondholders provide money for a company for a certain period of time and want companies to pay them back for their investment.

Why are sales not strictly considered to be the same thing as cash receipts? Sales are not liquid enough to be considered a form of cash flow. Sales include both cash sales and credit sales. Sales are not measured on a monthly basis and thus cannot be included in a cash budget. Sales include expenses outside of the cash budget.

Sales include both cash sales and credit sales. Correct! Sales made on credit are not considered a cash receipt until the time period in which they are collected.

What part of the NPV calculation is very important but difficult to estimate? The expected cash flows The life of the project The cost of capital The initial outlay

The cost of capital Correct! The cost of capital is affected by several things, such as different capital structures, timing of cash flows, and investment potential, which makes it difficult to calculate. An inaccurate prediction of the cost of capital may cause a firm to miss out on good projects or accept bad projects.

You calculate the PI of a project to be 1 but realize that some aspect of your calculation was incorrect and needs to be adjusted. Which adjustment to the PI estimation should cause you to reject the project? The cash flows were underestimated, so the adjusted annual cash flows are higher than the original ones. The initial outlay estimation was inaccurate, and after you adjust it, the new initial outlay is lower than the original. The length of project was underestimated, so in the new estimation, the life of the project is a couple of years longer with positive cash flows. The cost of capital was underestimated, so you adjust the cost of capital to be higher.

The cost of capital was underestimated, so you adjust the cost of capital to be higher. Correct! Increasing the cost of capital decreases the PI. Therefore, the new PI will be less than 1, and you should reject the project.

An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this? A par bond A preferred bond A discount bond A premium bond

A discount bond Correct! When the market price is less than the par price of a bond, you know that the YTM is currently higher than the coupon rate of that particular bond, so it is being sold at a discount.

Why do fixed assets increase as a lump sum instead of in proportion to sales growth? A firm will outsource production until it can use an entire production facility. A firm needs more fixed assets only when the DFN is negative. A firm purchases fixed assets in proportion to sales. A firm must purchase an entire fixed asset rather than just the portion needed to increase production.

A firm must purchase an entire fixed asset rather than just the portion needed to increase production. Correct!. A factory or a piece of equipment must be purchased as a whole.

Which scenario is an example of an agency problem? The management team works overtime without pay to complete financial reports. The owners of the company offer shares of the company to management. An employee takes a potential client to dinner and pays for it using the company credit card. A manager purchases a company car and allocates it as a company expense.

A manager purchases a company car and allocates it as a company expense. Correct! This is a luxury that does not improve shareholder value and costs the company money.

Which item represents an example of a cash disbursement a business might have this month? A rent check paid and cashed for the warehouse the company uses A purchase of inventory on credit that will be paid off next month A collection of accounts receivable on sales made last month Interest earned on bank deposits held by the firm.

A rent check paid and cashed for the warehouse the company uses Correct! Since this expense is being paid this month and the cash is being withdrawn from the company's account, this represents an example of a cash disbursement.

Which statement correctly contextualizes what a return is? A return is the amount of time it will take for an investor to recuperate their initial investment. A return is the gain or loss on an investment over some period of time. A return is the gain that one makes on an investment over a period of time. A return is probably one of the simplest terms in finance but is used only as part of data analytics.

A return is the gain or loss on an investment over some period of time. Correct! This is the correct definition of a return.

What are the main services offered by financial institutions? Deciding which assets to invest in to create wealth in the future Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Soliciting charitable donations and then managing the distribution of these funds Evaluating sources of funding for a business project, the capital structure of a firm, or actions managers could take to increase the value of the firm

Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions Correct! Financial institutions such as banks, insurance companies, and mutual fund companies provide these services.

What are spontaneous accounts? Accounts that do not vary with sales Accounts that vary naturally with sales Accounts that are optional to include when creating a financial forecast Accounts that are left to management's discretion

Accounts that vary naturally with sales Correct! By definition, when sales increase, the increase must be matched in another account, such as receivables.

When can the discretionary financing needed (DFN) be determined? After total revenue and expenses are projected After total revenue, alone, is projected After pro-forma financial statements are forecasted using the percent of sales method After total financing need is determined

After pro-forma financial statements are forecasted using the percent of sales method Correct! Once all the financial statements are projected according to a given set of assumptions, you can determine the financing required to fund the predicted growth in sales.

A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? Conflict between work and personal affairs Pursuing individual interest over client interests Agency problem due to conflicting interests Maximizing shareholder value

Agency problem due to conflicting interests Correct! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.

How can agency costs be mitigated? Creating a corporate hierarchy of several managers Aligning managers' interests with shareholders' interests Separating owners from management so their interests do not conflict Releasing managers who do not attempt to maximize immediate shareholder value

Aligning managers' interests with shareholders' interests Correct! This is most commonly done by compensating management with shares of ownership in the company.

What does the term legal describe? An action that conforms to accepted standards of conduct that guide a person's behavior. An idea or thing used as a measure, norm, or model in comparative evaluations. An action that is in accordance with the laws and rules set by an authority. An action that reflects one's beliefs about right and wrong, good and bad, or just and unjust.

An action that is in accordance with the laws and rules set by an authority. Correct! Legal means to follow the laws and rules set by an authority.

You signed an apartment contract today. You are going to pay $1,500 at the beginning of each month for the next 12 months, starting today. What type of cash flows is this contract? A perpetuity Uneven cash flows An ordinary annuity An annuity due

An annuity due Correct. An annuity due is a series of equal payments made at the beginning of consecutive periods.

What characterizes an ethical action? An ethical action will achieve the best outcome for the decision maker. An ethical action takes into account other individuals' values over the decision maker's own. An ethical action is based on accepted standards of conduct. An ethical action is based on what is right or wrong, whether or not society agrees.

An ethical action is based on accepted standards of conduct. Correct! An ethical action conforms to accepted standards of conduct.

Why would a company or individual want to retain risk? Companies never retain risk because they are already prone to so much market risk. Individuals retain risk because they are unable to transfer that risk to other entities. Both companies and individuals retain risk when they cannot afford the cost to reduce the risk. Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative.

Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative. Correct! This is the correct reasoning behind risk retention.

What is the name for a forecast of short-term events that helps a company understand if it has sufficient cash? Percent of sales forecast Cash budget Sustainable growth rate Time value of money

Cash budget Correct! A cash budget is a short-term forecast of future events that helps a company understand whether it has sufficient cash for regular operations.

What is the third step in finding a solution to an ethical dilemma? Move forward with the course of action you have chosen Consider alternative courses of action Identify and define the problem Consider all stakeholders involved

Consider all stakeholders involved Correct! First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved.

What is the second step in finding a solution to an ethical dilemma? Consider alternative courses of action Identify and define the problem Consider the consequences that may come from the action Calculate the value added to the company

Consider alternative courses of action Correct! First, identify and define the problem. Then, consider alternative courses of action.

What type of financial institution is an insurance company? Contractual Depository Circulatory Investment

Contractual Correct! Insurance companies are contractual savings institutions.

Which action increases a company's sustainable growth rate (SGR)? Decreasing asset use efficiency Decreasing dividend payout Decreasing the leverage the company uses Decreasing profitability

Decreasing dividend payout Correct! Decreasing dividend payout increases earnings retention and thus increases the SGR.

Which actions, taken together, will certainly increase a firm's ROE? Increasing total asset turnover and decreasing debt financing Increasing net margin and decreasing debt financing Decreasing equity financing and increasing net margin Decreasing equity financing and decreasing return on assets

Decreasing equity financing and increasing net margin Correct! Decreasing equity financing increases the leverage multiplier, therefore increasing ROE, and increasing net margin also increases ROE.

How can agency problems be reduced through corporate control? Executive compensation Accounting manipulations Acquisition of a foreign subsidiary Setting strict goals

Executive compensation Correct! By compensating the management team with stocks and stock options, management may be willing to take on riskier projects. This creates more value for the owners because riskier projects will increase the value of financial securities.

You are considering starting a new business to sell Widgets in your hometown. You can import the Widgets at a low cost, and you hope to be able to sell them for significantly more. Which ratio can help you calculate how much profit you will earn from the sale of each Widget? (Assume you are only considering the cost of the Widget, not any other operating costs.) Accounts receivable turnover Fixed asset turnover Operating margin Gross margin

Gross margin Correct! Gross margin tells you the percent of sales that become gross profit. The rest of the money earned from sales is used for the production of goods.

What are the three things one must determine before making a personal budget? Tax liabilities, expenses, and income Expenses, interest payments, and savings Income, expenses, and savings Liabilities, income, and expenses

Income, expenses, and savings Correct! Knowing these things allows you to create a statement that accurately reflects your cash flows from month to month.

How can a company reduce its discretionary financing needed (DFN)? Increase the dividend payout. Reduce prices. Reduce retention of earnings. Increase the net margin.

Increase the net margin. Correct! Increasing net margin increases the projected owners' equity, thus reducing the DFN.

Which action increases the return on equity of a firm if all else remains constant? Decreasing the total asset turnover Decreasing profitability Increasing equity financing Increasing debt financing

Increasing debt financing Correct! Increasing debt financing increases the leverage multiplier, which means that the ROE increases.

Which action decreases the discretionary financing needed (DFN)? Increasing the payback ratio Decreasing the net margin Increasing the plowback ratio Decreasing the retention ratio

Increasing the plowback ratio Correct! Increasing the plowback ratio increases projected owners' equity and thus decreases DFN.

What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? Compound interest Simple interest Inflation rate Interest rate

Interest rate Correct! This is the definition of interest rate.

What is the term for the risk that changes in interest rates will impact the value of a bond? Interest rate risk Firm-specific risk Systematic risk Default risk

Interest rate risk Correct. This is the risk that changes in interest rates will impact the value of a bond.

Suppose Alice is trying to explain to her friend, who knows nothing about the time value of money, why she should invest in Alice's new company. Which method of valuation should Alice use to convince her friend to invest? Cash budgeting Internal rate of return (IRR) Net present value (NPV) Debt-to-equity ratio

Internal rate of return (IRR) Correct! The IRR is easy to interpret, which makes it ideal for communicating the potential of an investment decision.

What is the difference between the current ratio and the quick ratio? Accounts payable are excluded in the calculation of a quick ratio. Notes payable are excluded in the calculation of a quick ratio. Inventory is excluded in the calculation of the quick ratio. Cash is excluded in the calculation of a quick ratio.

Inventory is excluded in the calculation of the quick ratio. Correct! Since inventory is the least liquid current asset, inventory is not included in the calculation.

How can a firm grow its fixed assets if it is expecting growth but has reached capacity with its fixed assets? Increase the net margin. Use the percent of sales method to forecast fixed assets. Continue to invest in capital through small increments over time. Invest a substantial amount of money at one time to increase capacity.

Invest a substantial amount of money at one time to increase capacity. Correct! Investments in fixed assets are capital-intensive, meaning they require large payments at one point in time.

What is a reasonable alternative to keeping an emergency stash of cash? Investing the money in a nicer car Investing in a savings account Investing in high-risk growth stocks Investing in long-term bonds

Investing in a savings account Correct! Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative.

A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? Central bank Pension fund Investment bank Private equity institution

Investment bank Correct! Investment banks facilitate complex financial deals, like mergers.

Which type of financial institution is a mutual fund? Contractual institution Federal institution Investment institution Depository institution

Investment institution Correct! Investment institutions provide individuals and firms access to financial markets.

Which type of financial institution provides individuals and firms access to financial markets? Depository institutions Investment institutions Credit institutions Contractual savings institutions

Investment institutions Correct! Investment institutions provide both individuals and firms access to financial markets.

What area of finance involves deciding which assets to invest in to create wealth in the future? Investments Investment banking Financial institutions Organizational finance

Investments Correct! Investments are an area of finance that involves deciding which assets to invest in to create wealth in the future.

Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? Accounting Investments. Capital structure Financial institutions

Investments Correct! Investments is the area of finance that seeks to create wealth in the future by deciding where to allocate money.

Which area of finance involves deciding which assets to invest in to create wealth in the future? Financial institutions Financial management Asset pricing Investments

Investments Correct! This area involves deciding which assets to invest in to create wealth in the future.

What is the main purpose of charging interest? It allows financial analysts to accurately calculate the time value of money when evaluating a project. It funds private banking institutions. It is what makes trading assets such as vehicles and land possible. It allows borrowers to pay to use the assets of another entity to accomplish their own goals.

It allows borrowers to pay to use the assets of another entity to accomplish their own goals. Correct! Because the funds do not belong to borrowers, they must pay to use them. This payment is the interest rate.

What is a disadvantage of using the NPV method? It often underestimates cash flows. It is not an effective way to compare projects of different sizes. It is not an effective way to compare projects with different time spans. It does not consider the time value of money.

It is not an effective way to compare projects of different sizes. Correct! NPV should not be used to compare projects of different sizes.

Why is the required rate of return also known as the hurdle rate? The investors cannot invest their money elsewhere. It takes into account that the prices of goods and services will increase. It is the minimum rate that a firm must surpass to accept a project. Investors have to overcome a certain level of risk to invest.

It is the minimum rate that a firm must surpass to accept a project. Correct! When a financial manager decides whether to invest in a certain project, the projected return needs to meet the minimum rate of return, or else the firm must "hurdle" the rate in order to accept the project.

What would an inverted yield curve signal? It may indicate an economic downturn. It may indicate higher interest rates for long-term bonds. It may indicate that inflation is rising at an unsustainable rate. It may indicate that the unemployment rate is falling.

It may indicate an economic downturn. Correct! An inverted yield curve reflects the expectation that the economy will have low or negative growth in the future.

About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy? It may indicate a decreasing unemployment rate along with higher wages. It may reflect an expectation that the economy will grow in the future along with higher inflation. It may indicate an economic downturn. It may indicate that the economy is in a steady state.

It may indicate an economic downturn. Correct! Since the long-term Treasury interest rate is lower than the short-term rate, it has an inverted yield curve, which may indicate an economic downturn.

W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. After W&H Inc. has developed a cash budget, what should the company do in the following months? It should begin tracking its cash inflows and outflows. It should monitor its actual cash flows and then revise the cash budget if needed. It should wait until the budgeted months are over and then make a new budget for the months following. It should invest any profits in new capital.

It should monitor its actual cash flows and then revise the cash budget if needed. Correct! Monitoring and revising the cash budget will allow W&H Inc. to identify and fix any problems that may arise.

A firm has paid off its short-term loans more quickly in the past couple of years. What might this trend indicate about the firm's financial ratios? Its leverage ratio is decreasing. Its activity ratio is increasing. Its profitability ratio is decreasing. Its liquidity ratio is increasing.

Its liquidity ratio is increasing. Correct! Liquidity is a measure of the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing.

Hannah is the financial manager of a firm. A project that she has recommended has been approved and will cost $5 million. Since the company does not have enough cash on reserve, Hannah must figure out how to raise enough money to start the project. She can choose whether to issue new bonds, new stocks, a mortgage loan, or some combination of those options. What task is Hannah performing in this scenario? Managing financial investments Making an investment decision Managing working capital Making a financing decision

Making a financing decision Correct! Since the project has already been approved, Hannah is trying to find a way to finance the investment and considering its capital structure.

What are financial managers doing if they evaluate whether it is worth spending money on research and development for a new product? Implementing a financial policy Managing working capital Making a financing decision Making an investment decision

Making an investment decision Correct! The financial manager assesses the costs and benefits of potential investments in order to wisely use the investors' money.

Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? Managing working capital Deciding on accounting standards Making financing decisions Making investing decisions

Making financing decisions Correct! Once investment decisions are made, a financial manager considers different possibilities of financing sources for the investments. This may include issuing new stocks and bonds.

Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? Making credit standard decisions Making financing decisions Making investment decisions Making inventory control decisions

Making financing decisions Correct! The manager is deciding where to get the funds to support a new project, which means the manager is making a financing decision.

What are long-term financial forecasts used for? Determining short-term operating needs Cash budgeting Making investment and financing decisions Developing savings, income, and expense strategies

Making investment and financing decisions Correct! Whatever growth a firm anticipates must eventually be financed one way or another. Any investment in capital that exceeds what the firm retains from profit generates a discretionary financing need.

Which task does a financial manager perform when assessing the costs and benefits of potential projects? Making investment decisions Managing working capital Implementing financial policies Making financing decisions

Making investment decisions Correct! Understanding how benefits weigh up against costs is the first priority before moving forward with financing and managerial decisions.

Which situation is an example of an agency problem? Managers follow their own interests instead of the owners' interest. Owners prevent managers from maximizing profits. A firm fails to maximize long-term investment. Managers do not agree with employees on material supply issues.

Managers follow their own interests instead of the owners' interest. Correct! An agency problem occurs when the agent (a manager) does not act in the best interest of the owners.

What makes market risk different from firm-specific risk? Market risk is caused by unexpected changes, and firm-specific risk is caused by expected changes. Market risk cannot be diversified away, and firm-specific risk can. Market risk is a factor in the risk-return relationship, and firm-specific risk is not. Market risk depends on internal systems within a company, and firm-specific risk is independent of internal systems.

Market risk cannot be diversified away, and firm-specific risk can. Correct! Market risk is inherent in the economy as a whole and therefore cannot be diversified away.

What kind of market primarily allows institutions to borrow and lend in the short term? Money market Futures and options markets Primary market Capital market

Money market Correct! Assets in money markets are typically highly liquid and intended for use within a year or less.

Which of these measures is a component of return on equity? Operating margin Fixed asset turnover Current ratio Net margin

Net margin Correct! Net margin, total asset turnover, and leverage multiplier are the components of return on equity.

Should a firm accept a project that has a PI of 0.8? Why? No, because the project would be generating cash inflows that are 20% short of the initial investment. Yes, because the PI is less than the cost of capital. No, because the PI is supposed to be represented as a dollar amount. Yes, because the PI would generate cash flows that are 80% more than the initial investment.

No, because the project would be generating cash inflows that are 20% short of the initial investment. Correct! As a rule, firms should accept only projects that have a PI greater than 1.

Which type of interest rate is the rate at which invested money grows for a certain period time? Nominal rate Risk-free rate Real rate Inflation rate

Nominal rate Correct! The nominal rate is the rate at which invested money grows for a certain period of time and is the interest rate most often used in your daily life.

Which type of account does not vary with sales and is left to management's discretion? Spontaneous accounts Accounts receivable accounts Non-spontaneous accounts Fixed assets accounts

Non-spontaneous accounts Correct! Non-spontaneous, or discretionary, accounts do not vary automatically with sales but are left to the discretion of management.

How might calculating financial ratios help shareholders? Ratios allow shareholders to participate in management decisions. Ratios can be used to know what exactly is happening in a firm by answering questions about the firm. Ratios help shareholders audit firms to make sure they are in accordance with GAAP standards. Ratios can be used to determine whether a firm is maximizing shareholder wealth.

Ratios can be used to determine whether a firm is maximizing shareholder wealth. Correct! Ratios are used to evaluate managerial actions so shareholders can determine how effectively and profitably managers are using their invested capital.

Which items are considered cash disbursements for a business? Raw materials, rent, administrative expenses, interest, and selling expenses Dividends, investments, cash sales, and tax liabilities Rent, accounts receivable, accounts payable, and raw materials Cash sales and accounts receivable

Raw materials, rent, administrative expenses, interest, and selling expenses Correct! These are common products or services that a firm pays cash for during a specified period in order to generate sales.

Which action reduces the future value of cash flows? Receive all cash flows later than expected. Increase the discount rate. Receive all cash flows earlier than expected. Increase the inflation rate.

Receive all cash flows later than expected. Correct. The later the cash flows are recieved, the lower the future value is.

MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios, but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve its return on equity, which action would help? Perform market-to-book analysis to determine if the trading value of its equity is undervalued. Reduce asset efficiency by idling some of its operating plants. Pay off a significant portion of its debt. Reduce costs to improve its overall profitability.

Reduce costs to improve its overall profitability. Correct! The third component of return on equity is profitability as indicated by the profit margin. By increasing its profit margin, MiniCo would increase its return on equity as well.

What is the name for the minimum rate of return that an investor or lender will accept for investments? Simple interest Required rate of return Inflation rate Growth rate

Required rate of return Correct. This is the rate that investors accept as compensation for risk, opportunity cost, and inflation.

What is the compensation for risk given to investors called? Opportunity cost Risk premium Real rate Risk-free rate

Risk premium Correct! Risk premium is the compensation that investors take for the risk they have to bear.

How is risk separation different from diversification? Risk separation involves dispersing assets across economies instead of focusing them in one economy Risk separation involves dispersing resources across different investment vehicles within the same asset class. Risk separation involves dispersing assets geographically instead of concentrating them in one location. Risk separation involves dispersing resources geographically in one location instead of across several locations.

Risk separation involves dispersing assets geographically instead of concentrating them in one location. Correct! This is the main difference between the two techniques.

Which component of an interest rate is an indicator of inflation and opportunity cost? Growth rate Purchasing power Risk premium Risk-free rate

Risk-free rate Correct! The risk-free rate describes the rate of return on an investment with no risk, so it just measures inflation and opportunity cost.

Endothon Company has decided to move its production from the United States to a foreign country. Which situation below would constitute an unethical action by the company? Saving money by paying inadequate wages to workers overseas Lowering costs while keeping prices the same for customers Telling current employees about the decision early on Monitoring public perception of the company

Saving money by paying inadequate wages to workers overseas Correct! Other countries may not have laws that protect workers, such as minimum wage laws.

In which financial market are securities such as stocks and bonds are traded after their initial issuance? Initial market Dealer market Secondary market Primary market

Secondary market Correct! Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.

A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? Let the company manipulate accounting procedures. Set a strict covenant that the company cannot easily achieve. Push the company to pay dividends to the shareholders. Let the company take the mortgage loan because of its long partnership with the bank.

Set a strict covenant that the company cannot easily achieve. Correct! By setting a strict covenant, there is a risk that the company may not meet its obligation, which would deter the company from taking on risky projects.

BigDog and SmallDog are two companies that have an identical return on equity. One difference between the two companies is that BigDog has 40% of assets financed by debt while SmallDog has 100% of assets financed by equity. What can you conclude about BigDog and SmallDog? SmallDog has a smaller ROE than BigDog. SmallDog has a higher ROA than BigDog. SmallDog has a higher ROE than BigDog. SmallDog has a smaller ROA than BigDog.

SmallDog has a higher ROA than BigDog. Correct! Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of BigDog. Since both companies have the same ROE, SmallDog must have a higher ROA.

Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company's leadership the fastest that ABC can grow? Sustainable growth rate Return on equity Discretionary financing needed Key growth indicator

Sustainable growth rate Correct! Sustainable growth rate is defined as the rate at which a firm can grow without issuing new equity. It implies that the firm's growth comes from the return on equity less any dividends.

What is the rate at which a firm can grow without issuing new equity? Discount rate Retention rate Sustainable growth rate Internal rate of return

Sustainable growth rate Correct! The sustainable growth rate is the growth rate that allows a firm to maintain its present financial ratios without issuing new equity.

What is the main difference between the current ratio and the quick ratio? The quick ratio includes accounts receivable in current liabilities, and the current ratio does not. The quick ratio is faster to calculate than the current ratio. The quick ratio is used for smaller companies, and the current ratio is used for larger companies. The current ratio includes inventory in current assets, and the quick ratio does not.

The current ratio includes inventory in current assets, and the quick ratio does not. Correct! Inventory is the least liquid of all current assets. By not including inventory, the quick ratio is a more stringent test of a firm's ability to meet short-term obligations.

What makes the expected return subjective and different from other types of returns? The expected return is subjective because it uses 360 days as a full year instead of 365 days. The expected return is the only return used to compare different investment decisions. The expected return is based on prices and cash flows. The expected return is based on expectational data and the probability of different scenarios occurring.

The expected return is based on expectational data and the probability of different scenarios occurring. Correct. The expected return is calculated from hypothesized or "best-guess" estimates of future prices or returns in different scenarios.

What does high inventory turnover relative to the industry and competitors indicate? The firm's production and operation costs are too high. The firm has mastered its asset use efficiency to generate sales. The firm does not hold enough inventory and is making its customers wait longer to receive their purchased goods. The firm does not have the ability to meet short-term obligations.

The firm does not hold enough inventory and is making its customers wait longer to receive their purchased goods. Correct! A high inventory turnover ratio indicates that there is not enough inventory available to meet customer needs in a timely manner.

What does it mean when a firm's calculated discretionary financing needed (DFN) is negative? The firm will have enough financing to fund projected sales. The firm needs to consider getting extra financing from the bank. The firm should consider getting extra financing by issuing new stocks. The firm's balance sheet will be in balance at that point in the forecast.

The firm will have enough financing to fund projected sales. Correct! If total projected liabilities and owners' equity are greater than total projected assets, then no additional financing is needed.

What is the sustainable growth rate (SGR)? Accounts that do not vary with sales but are up to management's discretion The external financing needed to meet the projected growth The growth rate that allows a firm to maintain its present financial ratios without issuing new equity Accounts that vary with the change in sales

The growth rate that allows a firm to maintain its present financial ratios without issuing new equity Correct! The SGR is the growth rate that allows a firm to maintain its present financial ratios without issuing new equity.

What does inventory turnover assess? The inventory management of a firm How well a company is doing overall The proportion of inventory financed by equity How well a firm can meet short-term obligations through sales

The inventory management of a firm Correct! Inventory turnover tells us how well a firm is managing its inventory.

The word risk is used in many different contexts. How is risk defined in finance? The uncertainty that one project will be more or less successful than another The probability that the expected return will accurately calculate the realized return on a project The possibility that the realized or actual return will differ from the expected return The idea that accepting one project will result in forgoing projects with greater returns

The possibility that the realized or actual return will differ from the expected return Correct! This is an appropriate definition of risk.

How is risk defined in finance? The probability that a recession occurs The probability that systematic factors in the market will affect an investment The probability that firm-specific factors will affect an investment The possibility that the realized or actual return will differ from what we expect

The possibility that the realized or actual return will differ from what we expect Correct. Risk is defined as the possibility that the realized or actual return will differ from our expected return.

What is the inflation rate? The rate that is adjusted to remove the effects of increased prices of goods and services The rate at which the average price level of a basket of goods and services in an economy increases The rate of return that an investor will accept for investment The rate at which invested money grows for a certain period of time

The rate at which the average price level of a basket of goods and services in an economy increases Correct! The rate at which the average price level of a basket of goods and services in an economy increases is the inflation rate.

What tends to happen to the risk of an investment that offers a higher return? The risk is not affected when an investment has a higher return. The risk of a well-diversified portfolio with high returns is always higher than the highest-risk stock in the portfolio. The risk is higher for an investment with a higher return. The risk is lower for an investment with a higher return.

The risk is higher for an investment with a higher return. Correct! The higher the risk an investor takes, the higher the reward the investor is compensated with.

Which type of financial market is where securities such as stocks and bonds are traded after their initial issuance? The initial public offering The primary financial market The secondary financial market The dealer market

The secondary financial market Correct! Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market.

What does the discretionary financing needed (DFN) tell us? The total amount of liabilities that a firm is projected to have The total amount of investment needed for future years The total amount of owners' equity that a firm is projected to have The total amount of funding that management will need to obtain through discretionary financing sources

The total amount of funding that management will need to obtain through discretionary financing sources Correct! DFN is the difference between the projected total assets and the projected total liabilities plus owners' equity. Any discrepancy between the sources and uses of finance is extra financing that management must obtain.

What is the primary goal of the financial manager of a firm? To minimize the asset holdings of the firm To maximize the manager's utility To maximize owner wealth To minimize the costs of the firm

To maximize owner wealth Correct! The financial manager should make decisions based on the primary goal of maximizing owner wealth.

What is the main goal of a firm? To circulate money in the economy To make decisions on how to finance projects To maximize owner wealth To make investment decisions

To maximize owner wealth Correct! The main goal of a firm is to maximize owner wealth, and the financial manager should make decisions based on this goal.

What is the primary aim of personal finance goals? To create more wealth and returns on investments To increase consumption of goods and services To maximize satisfaction from products purchased and services obtained To maximize shareholders' utility by increasing a firm's value

To maximize satisfaction from products purchased and services obtained Correct! The objective of personal financial goals is to maximize one's utility.

Which responsibility is a focus of the U.S. Securities and Exchange Commission? To protect investors To regulate inflation To provide liquidity To raise interest rates

To protect investors Correct! The responsibilities of SEC are to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

What are the purposes of financial markets? To affect the distribution of income for investors To maintain fair, orderly, and efficient markets To willingly take risk and capture returns To provide liquidity and determine prices

To provide liquidity and determine prices Correct! The purposes of financial markets are to provide liquidity and to determine prices.

Why might a firm seek capital investment? Why might a firm seek capital investment? To pay short-term loans To fulfill expected dividend payments To pay off bondholders To purchase long-term assets for future growth

To purchase long-term assets for future growth Correct! Firms need funding for projects that will increase shareholder wealth in the future.

Why is built-in inflation linked to adaptive expectations? Expectations of accidents or high demand cause expectations of price increases. Increased demand for goods and services becomes unbalanced with the supply of goods and services. Regulations set by the authorities build an expectation of price increases. Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher.

Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. Correct! When the prices of goods and services go up, employees expect and even demand higher wages to maintain their living standard, which will lead to further increases in prices.

A company called Bobby's Books is considering purchasing a new bookbinding machine. The company calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase the bookbinding machine? No, because the old bookbinding machine still works. Yes, because the IRR exceeds the cost of capital. No, because the hurdle rate is lower than the IRR. Yes, because newer models of equipment are always profitable investments.

Yes, because the IRR exceeds the cost of capital. Correct! When the IRR of a project is greater than the hurdle rate (the required rate of return, or cost of capital), it indicates that the company should accept the project.

You are calculating the present value of an annuity due of $5,000 a year for 20 years. The discount rate is 3%. What should be the "type" input variable of the PV function? 5000 20 0.03 1

1 Correct! The type is the cash flow type in the PV function. 1 = BEGIN, or an indication of an annuity due.

In 1980, the inflation rate was 5% and a particular investment gave a return of 15%. In 2010, the inflation rate was 5% and the same investment gave a return of 12%. In which year did stockholders gain greater purchasing power and why? 1980 because the real rate was higher than in 2010 2010 because the nominal rate was higher than in 1980 1980 because the return was higher than in 2010 2010 because the inflation was greater than in 1980

1980 because the real rate was higher than in 2010 Correct! In order to compare purchasing power, you have to find the real rates. The real rate is nominal rate minus inflation. Therefore, the investment gave higher purchasing power in 1980 than in 2010.

The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest rate? 13% 3% 5% 8%

5% Correct. Real Rate = Nominal Rate - Inflation, so 8% - 3% = 5%.

You are calculating the future value of an ordinary annuity. You are planning to save $1,000 a year for the next 10 years in an account that gives a 3% interest rate. You set up an Excel sheet as follows: What should you have in cell C7 in order to calculate the future value correctly and to make sure that any changes in inputs reflect automatically when you change any of the variables in cells C2:C6? =FV(C6,C5,C4,C3,C2) =FV(C2,C3,C4,0,0) =FV(0.03,10,-1000,0,0) =FV(C2,C3,C4,C5,C6)

=FV(C2,C3,C4,C5,C6) Correct! To find a future value, you need to use the FV function and reference cells in order of rate, nper, pmt, pv, and type to return a correct future value and reflect any changes you may make in the input.

Which Excel function should be input to cell C5 to find the interest rate of the following cash flows? Assume the discount rate is 12%. =NPV(C4,C3:E3)+B3 =NPV(B3:E3) =IRR(C4,C3:E3)+B3 =IRR(B3:E3)

=IRR(B3:E3) Correct! This choice uses the IRR function, which is the function needed to find the interest rate. The only reference is to the cash flows, which is what the IRR function asks.

You are considering purchasing a house for $250,000. You have two options to finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option requires you to pay more in total interest? A 30-year mortgage Both are the same A 20-year mortgage Cannot be determined

A 30-year mortgage Correct! Even though the interest rate is the same, the longer the loan is, the more interest you pay for the mortgage.

Which statement below is an example of how ratios are used in the field of finance? A firm's ratios may vary year over year, so they are not helpful for evaluating whether firm goals are met. Ratio analysis is performed based on a strict set of rules governed by generally accepted accounting principles. A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Ratios are helpful only when comparing companies that are the same size and that use the same operational style.

A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Correct! This is called cross-sectional analysis and is common in financial analysis.

What is default risk? A market-specific risk that comes from the probability of a loss resulting from a borrower's failure to repay a contractual obligation A firm-specific risk that comes from the probability of a loss resulting from a borrower's failure to repay a contractual obligation A firm-specific risk that demonstrates the inverse relationship between the probability of default and the required rate of return A market-specific risk that affects both the bonds and stocks of a firm

A firm-specific risk that comes from the probability of a loss resulting from a borrower's failure to repay a contractual obligation Correct! This is the correct definition of default risk.

Which item is an example of a cash receipt in a personal budget? A ski pass worth $65 that your roommate gives you in exchange for borrowing your car A payment of $125 for an annual doctor's visit A purchase of $53 for groceries and toiletries for the week A graduation gift of $100 from your grandmother

A graduation gift of $100 from your grandmother Correct! Since this is money, or income, coming into your cash budget, it represents a cash receipt.

What is an expected return? The cost to a firm to use an investor's capital A hypothesized estimate of future returns under different scenarios based on expectational data The annual interest rate that is charged for borrowing money A return over the entire period that an investor owns a financial security

A hypothesized estimate of future returns under different scenarios based on expectational data Correct! This choice is the definition of expected return.

How is the interest rate expressed? As a dollar amount As a fractional probability As a percentage As a ratio

As a percentage Correct! Interest is the percentage of the principal that a lender receives or that a borrower pays to use the money.

Why does an increased demand for goods and services cause inflation? An increase in demand causes people to want less goods and services because of increased competition, which will result in a decrease in market price. An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. An increase in demand results in better-quality goods, which means that they will be more expensive. An increase in demand causes a decrease in prices because suppliers are not willing to meet the increased demand.

An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. Correct! An increase in demand results in an increase in prices, which is the definition of inflation.

What is a depository institution? An institution that accepts and pays interest on deposits of money, as well as extends loans An institution that has a goal to maximize owner or shareholder wealth An institution that provides individuals and firms access to financial markets

An institution that accepts and pays interest on deposits of money, as well as extends loans Correct! This is the definition of a depository institution. Examples include banks and credit unions.

Which example below is considered a market risk factor? A company's top management personnel die in a plane crash. An oil tank bursts and floods a company's production area. An unexpected change in interest rate occurs. A company's labor force goes on strike.

An unexpected change in interest rate occurs. Correct. This is a factor that affects everyone because it will cause the cost of borrowing and lending to increase. This is a market risk factor.

What is the name for the interest rate expressed on an annual basis? Compound interest Real interest rate Annual percentage rate Simple interest

Annual percentage rate Correct! The APR is the annual interest rate that is charged for borrowing money or that is earned through investment, and it is calculated on an annual basis.

Twenty years ago, Mateo started an investment account with $2,000. He then invested $100 into the account every month at the end of each month. Today, he has $46,528 in the same account. What is the term for the $100 monthly cash flows? Present value Perpetuity Annuity Future value

Annuity Correct. The fixed amount of $100 given every month is an annuity.

Suppose Sophia is considering a new stock investment for her retirement account. This stock has significant risk, but is quite popular in the market. Inflation for the next few years is expected to be 2-3% per year, and the current U.S. Treasury rates are about 2%. How should she use this information to decide what type of return she can expect from the stock? Based on the risk level, she should be willing to accept a return from the stock less than the current U.S. Treasury rates. Based on the stock's popularity, she should not consider the opportunity costs of other assets' potential returns when setting the required rate. Based on the type of financial security, the company selling the stock should set the required return used to assess the stock. Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk.

Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk. Correct! Since the inflation of 2-3% will reduce any nominal returns she receives by this amount, she would want a higher return to accommodate for the opportunity costs and risks associated with the investment.

Why are several different types of ratios used to analyze a firm? Because other ratios must be calculated before the main ratio can be calculated Because certain types of ratios become obsolete as a firm innovates Because different types of ratios are needed to get information about different parts of a firm Because ratios are sometimes inaccurate, and firms have a greater chance of calculating an accurate ratio if they calculate multiple ratios

Because different types of ratios are needed to get information about different parts of a firm Correct! Using only one type of ratio in a full financial analysis of a firm would not tell you very much information about the firm. It is through the calculation of many ratios that an analyst will be able to see the bigger picture of the firm.

Why is "put $50 in a savings account each month for Christmas gifts" a better budgeting goal than "save money for Christmas gifts"? Because it demonstrates a knowledge of the correct steps of cash budgeting Because "save money for Christmas gifts" is unattainable Because $50 is a realistic amount to save each month Because it is specific and measurable

Because it is specific and measurable Correct! Effective financial goals provide a specific and concrete target to focus on.

Why does the time value of money play an important role in financial decision-making? Because the time value of money helps you estimate the cost of capital of any project Because the time value of money helps you estimate cash flows received at different times so that you can sum up all the benefits and costs Because you do not need to consider inflation, opportunity cost, or risk for investments when using time value of money Because the benefits of investments received at different times are comparable only when you consider the time value of money

Because the benefits of investments received at different times are comparable only when you consider the time value of money Correct! With the time value of money, you can find today's value of future cash flows to compare the costs and benefits of different investments.

A firm had sales of $100,000 this month. However, the firm received only $90,000 in cash from sales. Why would the firm receive $10,000 less cash than its monthly sales? Because the firm did not make all sales on cash Because the firm paid down $10,000 on a loan Because the firm purchased inventory on credit this month Because the firm paid cash for inventory purchased

Because the firm did not make all sales on cash Correct! Some sales are made on credit rather than cash, and a portion of credit sales are collected in the following months after the sales.

Why would a monthly mortgage payment be considered a fixed expense? Because you have control over the amount you pay each month Because the bank changes the payment amount each month Because the payments vary based upon the cost of the house Because the payment is the same amount each month

Because the payment is the same amount each month Correct! A mortgage is a fixed expense, meaning that the payment amount is the same each month. Knowing which of your expenses are the same from month to month will help you budget more accurately.

Why are ratios considered flexible? Because they are based on estimates and thus do not have to be exact Because they are not regulated and can be changed or invented according to a firm's needs Because they do not require historical financial data in order to analyze a firm Because there are five ratios that must always be calculated and then reported on public financial statements

Because they are not regulated and can be changed or invented according to a firm's needs Correct! Because financial ratios are an internal management tool, they are not subject to external rules and regulations.

Why are activity ratios also called efficiency ratios or asset use efficiency ratios? Because they measure how well a company uses its assets to generate sales or cash. Because they are used to evaluate the current value of a company. Because they are used to directly judge how well management is doing at maximizing owner wealth. Because they consider how a firm's assets are financed.

Because they measure how well a company uses its assets to generate sales or cash.

The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing in comparison to other similar firms. What is this process called?

Benchmarking Correct! Benchmarking allows management to see how firms differ from one another and evaluate their performance relative to each other.

How far into the future do cash budgets usually forecast? Between one and two weeks Between one month and one year Between five and ten years Between one and three years

Between one month and one year Correct! Cash budgets are not useful if they forecast less than one month, and it is not necessary for cash budgets to extend beyond one year in the future.

Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? Bondholders are primarily interested in maintaining the company's current financial status. Bondholders are primarily interested in the company paying more dividends. Bondholders are primarily interested in maximizing shareholder wealth. Bondholders are primarily interested in making sure they will be paid back.

Bondholders are primarily interested in making sure they will be paid back. Correct! If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which means that the bondholders may put themselves at a higher risk of not receiving their loan back.

What tool can you use to understand your overall personal cash flows? Investing Budgeting Saving Setting financial goals

Budgeting Correct! Budgeting helps you to understand your income and expenses and to analyze your cash flows.

You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings account for the time being. What would be considered an opportunity cost of putting the money in savings? The fees you must pay to your bank to hold the $25,000 Having access to the money should you have some sort of financial emergency Earning interest on the $25,000 you just put in savings Buying a brand new car worth $25,000

Buying a brand new car worth $25,000 Correct! Buying a new car would be considered an opportunity cost because it is something you are giving up by keeping the money in your savings account.

Which situation is a real-life example of risk transfer? Changing investment vehicles—risk is transferred from one asset to another Buying home insurance—risk is transferred from the policyholder to the insurer Purchasing U.S. Treasury bonds—risk is transferred from the holder of the bond to the government Using your 401(k) investment to buy a home—risk is transferred from the 401(k) fund to the home

Buying home insurance—risk is transferred from the policyholder to the insurer Correct! This is a correct example of risk transfer.

What are the three main uses of cash budgets? Cash budgets show lenders how effective the management of a business is, allow for corrective action when needed, and increase a firm's degree of leverage. Cash budgets allow periodic performance evaluation, inform investors of changes in net income, and allow businesses to gain access to credit. Cash budgets help companies know how much to invest in capital, aid in expense tracking, and predict when additional financing is needed. Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed.

Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. Correct! A good cash budget is used in these ways to help a firm operate more effectively and efficiently.

W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. Why would creating a cash budget be useful for W&H if the firm needs a loan from the bank or another short-term lender? Cash budgets allow businesses to seek financing from multiple lenders at a time, increasing borrowing capabilities. Cash budgets help lenders identify a business's investing strategy going forward, establishing confidence in future operations. Cash budgets increase the lender's trust in a firm by demonstrating the firm's ability to make profits and repay loans. Cash budgets include a detailed credit report of the business's operations, which proves that the company can use borrowed funds responsibly.

Cash budgets increase the lender's trust in a firm by demonstrating the firm's ability to make profits and repay loans. Correct! Cash budgets are detailed plans that show creditors that a firm will have enough cash from month to month to support its operations while staying within acceptable borrowing limits. A good cash budget allows creditors to feel secure in lending money to the firm.

W&H Company wants to create a cash budget to better manage its cash flows. The financial manager knows that the firm's labor costs and materials costs are too high for the level of sales each month. The firm also needs to keep better track of its cash flows to assess its need for additional financing through short-term loans. W&H Inc.'s labor costs each month are an example of which item in a cash budget? Cash disbursement Net cash for the month Minimum cash need Cash receipt

Cash disbursement Correct! This is a cash disbursement for the firm because it represents cash going out during the month to pay employees.

What three things should be included in a cash budget for a business? Cash receipts, cash disbursements, and savings Sales, expenses, and borrowing Income, expenses, and savings Cash receipts, cash disbursements, and borrowing

Cash receipts, cash disbursements, and borrowing Correct! All three of these things affect cash flows in a business and should be included in a cash budget.

Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? Credit union Mutual fund Commercial bank Central bank

Central bank Correct! Central banks control the supply of money in the economy.

Personal income is which type of economic indicator? Leading Lagging Unifying Coincident

Coincident Correct! Coincident indicators change as the economy changes.

In what way is preferred stock different from bonds? Preferred stock payments are fixed, but bond payments are not. Companies must pay preferred stockholders but not bondholders before common stockholders. Companies are allowed to skip payments to preferred stockholders but not to bondholders. Preferred stockholders do not have voting rights, but bondholders do.

Companies are allowed to skip payments to preferred stockholders but not to bondholders. Correct! If companies skipped bond payments, they would go into default. Companies can skip payments for preferred stock. However, by skipping these payments, companies are not able to pay common stockholders and must pay dividends in arrears at some point.

Which action would help you make your budget more efficient? Reduce your payments toward savings so you have enough for monthly expenses. Every month, increase the allotted amounts for each category of your budget. Create only two categories for expenses: necessary and unnecessary. Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary.

Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. Correct! This would allow you to keep your budget updated and effective so you can make the best use of your money.

What is operating margin useful for? Comparing the profitability of firms with different capital structures Understanding production cost efficiency Identifying how efficiently firms are using their assets to generate sales Assessing whether a firm can meet short-term obligations without raising external capital

Comparing the profitability of firms with different capital structures Correct! Operating margin is calculated pre-interest, so you can frequently use it to compare firms with different capital structures.

Which type of interest rate includes interest on interest in addition to interest on the principal? Compound interest Simple interest Yield to maturity Nominal interest rate

Compound interest Correct. The compound interest is known as interests on interests and the principal instead of only on the principal.

Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? Business finance Real estate Investments Financial institutions

Correct! Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm.

What is the primary difference between finance and accounting? Finance focuses on the future, while accounting is generally backward-looking. Accounting involves investing and forecasting, while finance summarizes a company's financial information. Finance provides financial data to decision makers, and accounting involves making decisions using that data. Accounting focuses on the future, while finance is generally backward-looking.

Correct! Finance is the management and allocation of capital with the objectives of investing, forecasting, budgeting, saving, lending, and borrowing.

You are a financial analyst of an investment bank, and you are doing research on equity. You are looking at a book publisher's financial ratios in comparison to its competitors and the industry average. What is this an example of? Progress measurement Trend analysis Performance evaluation Cross-sectional analysis

Cross-sectional analysis Correct! Cross-sectional analysis compares a firm's financial ratios with those of a peer group.

What is the correct order of the three steps necessary to create a cash budget? Estimate cash disbursements, predict expenses, create the cash budget Create the cash budget, determine cash receipts, estimate cash disbursements Determine cash receipts, estimate cash disbursements, create the cash budget Evaluate income, create the cash budget, estimate cash disbursements

Determine cash receipts, estimate cash disbursements, create the cash budget Correct! Doing these three things in this order can help you understand your business, understand the timing of cash flows, and keep track of borrowing requirements.

What is another name for the cost of capital? Discount rate Inflation rate Real rate Compound interest

Discount rate Correct. Cost of capital, discount rate, required rate, and interest rate are the same thing with different names based on different perspectives.

You are a financial manager of a company. The marketing department has informed you that the projected sales growth for the upcoming year is 10%. As you conduct financial forecasting, you keep the long-term liabilities the same amount as the previous year and will discuss this account with the other managers later. What type of account is long-term liabilities? Discretionary account Spontaneous account Projected asset account Projected owners' equity account

Discretionary account Correct! Discretionary accounts do not vary automatically with sales but are left to the discretion of management. In this scenario, you kept the long-term liabilities account the same.

What is the name for the process of "spreading" money over many different assets? Spreading Diversification Correlation Minimization

Diversification Correct! The question stem is the definition of diversification.

What should be the main question a firm asks when considering any investment decision? Will this investment add value to the firm? Do the benefits of this investment outweigh the costs? What is the best investment in the stock market? Will this investment help the company reduce costs?

Do the benefits of this investment outweigh the costs? Correct! For any investment, you should expect to receive a benefit worth at least as much as the initial cost.

What allows an investor to determine which financial activities are contributing to changes in the return on equity? Cross-sectional analysis Flexibility DuPont framework Trend analysis

DuPont framework Correct! Decomposing the DuPont framework enables analysis of fundamental performance to determine which financial activities are contributing to changes in the return on equity.

Which term refers to something that conforms with accepted standards of conduct that guide a person's behavior? Standard Moral Legal Ethical

Ethical Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior

What role does financial forecasting play in the future success and growth of a firm? Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. Financial forecasts are much less important than cash budgets because cash budgeting is the only essential tool a firm needs to attain long-term success. Financial forecasts are only moderately useful because predicting the future is impossible. Financial forecasting looks backward to provide historical data that informs future operations.

Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. Correct! While understanding the past is key to moving forward, accounting for any proposals in your forecasts highlights where funding may be needed or where you might actually have more room to spend.

Which professional works with individuals to help them achieve their financial goals? Financial planner Commercial banker Corporate financial analyst Private equity manager

Financial planner Correct! Professional financial planners work with individuals to help them achieve their financial goals.

You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making? Investing Analyzing data Financing Assessing

Financing Correct! Part of the personal finance process is figuring out how to finance your goals in a way that is within your means.

Omar is about to purchase a new car for $30,000. He knows he wants to buy the car, but he is still trying to decide how to pay for it. He has barely over $30,000 in his bank account. He can either take out an auto loan from a bank or use a mix of cash and an auto loan. In this scenario, what is Omar doing? Investing to achieve a goal Assessing a financial goal Budgeting Financing a goal

Financing a goal Correct! He has already made a decision to purchase the car and is now deciding on financing options.

What type of ratio is used to consider how a firm is financed and to assess a firm's ability to pay interest and pay back long-term obligations? Financing ratios Profitability ratios Market ratios Activity ratios

Financing ratios Correct! Financing ratios consider how a firm is financed.

You are comparing the return on equity of Firm 1 and Firm 2. Both firms have an identical profit margin and asset turnover, but Firm 1 has an overall higher return on equity. What must be true? Firm 2 has a higher cost of sales relative to Firm 1. Firm 1 is using a higher proportion of debt to finance its operations. Firm 2 is not using its assets as efficiently as Firm 1 to generate sales. Firm 1 has a lower times interest earned because its return on equity is higher.

Firm 1 is using a higher proportion of debt to finance its operations. Correct! The third component of return on equity is the leverage multiplier. Since the firms' profit margins and asset turnovers are the same, it must be the leverage multiplier that is different. Using a higher amount of debt would result in a larger leverage multiplier and an overall higher return on equity.

Knowing that you are taking this finance class, a friend asks you about two investment opportunities he is considering. He wants to know which of the firms is using its assets more efficiently to generate sales. Which set of information could help you determine this? Firm A has a leverage ratio of 3, and Firm B has a leverage ratio of 1.5. Firm A has a gross margin of 40%, and Firm B has a gross margin of 35%. Firm A has an asset turnover of 4, and Firm B has an asset turnover of 2.5. Both firms have a return on assets of 5%, but Firm B has a higher profit margin.

Firm B has an asset turnover of 2.5. Correct! Asset turnover is an indicator of how well a firm uses its assets to generate sales. Since Firm A generates $4 of sales for every $1 of assets, it is using its assets more efficiently.

Which type of risk can be reduced by adding a variety of different assets into a portfolio? Firm-specific risk Interest rate risk Systematic risk No risk

Firm-specific risk Correct! Firm-specific risk can be diversified away.

Which statement accurately describes firm-specific risk? Firm-specific risk can be defined as risk that can be diversified away by choosing the appropriate industry to invest in. Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors. Firm-specific risk is the risk associated with problems that companies may face because of changes in interest rates, changes in cash flows due to tax changes, and business cycle changes. Firm-specific risk can be defined as risk that results from factors at a certain point in the economy.

Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors. Correct! This is the appropriate definition of firm-specific risk.

Which account should be looked at first when examining capacity constraints to determine whether the discretionary financing needed (DFN) can be reduced? Fixed assets Notes payable Long-term debt Accounts receivable

Fixed assets Correct! You can recheck capacity analyses to verify whether the firm really needs as large of an increase in fixed assets as projected in the forecast.

You are analyzing fixed assets to create pro forma financial statements for your company. You realize that, since sales will increase next year, you will also need your manufacturing capacity to increase by the same amount. Currently, you are operating at maximum capacity. You buy an entire new factory and multiple pieces of equipment that increase capacity to much more than you need to meet the sales growth. Which concept describes why such a large purchase was necessary? Sales are uncertain for the future year. Fixed assets are spontaneous accounts. Additional financing could not be obtained. Fixed assets are lumpy.

Fixed assets are lumpy. Correct! You cannot purchase only part of a factory and equipment to meet the sales growth. Instead, you must purchase the entire factory along with all the equipment to meet the sales growth. We call the increase of fixed assets as the firm approaches its full capacity "lumpy assets" because it requires a lump sum purchase.

You are the financial manager of a firm. The firm is small and is struggling to collect cash from accounts receivable. Also, due to the nature of industry, inventories are illiquid. To make sure that the firm has enough cash holdings for short-term obligations, you decide to create a new ratio of cash to short-term obligations. What is this scenario an example of? Standardization Trend analysis Cross-sectional analysis Flexibility

Flexibility Correct! Ratio analysis is flexible, so you can create a new ratio given the need of the firm.

What does a net margin of 7% indicate? For every dollar of total assets, 7 cents are generated as sales. For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered. For every dollar of revenue, 7 cents remain for the debt holders and equity holders after all other costs are covered. For every dollar of fixed assets, 7 cents are generated in sales.

For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered. Correct! Net margin tells us the percentage of sales that will become net income, which is the amount remaining for the equity holders.

You are conducting financial forecasting for your firm given the projected sales. What are you doing if you are estimating changes in the balance sheet based on the predicted change in sales? Projecting discretionary accounts Forecasting spontaneous accounts Determining total financing need Calculating retained earnings

Forecasting spontaneous accounts Correct! Spontaneous accounts change in proportion to sales growth.

If you invest $10,000 today and then $5,000 each year for the next 5 years into an investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years. What does $39,248.14 represent? Annuity Perpetuity Present value Future value

Future value Correct. Future value measures the worth of relative past cash flows. The $39,248.14 is relative future to other cash flows

Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take? After introducing the product, show the client data about the index fund from only the years that the index fund did poorly. Introduce the company's product as the best choice available and offer to waive the fee to invest. Give the client a recommendation of the company's product, and only offer more information about other products if she asks for it. Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years.

Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years. Correct! Giving a recommendation to sell a product is fine, but you should never hide other information. Sharing information about index funds and comparing your product to others is a fair action to take for the client.

What is the term for the return over the entire period that an investor owns a financial security? Expected return Required rate of return Real return Holding period return

Holding period return Correct. This is the definition of holding period return.

Which question is answered by financial forecasting? What is the firm's current market share? How will an increase in the firm's tax rate affect the firm's net income? Which product will produce the most in sales over the next year? How much financing will the firm need in the future?

How much financing will the firm need in the future? Correct! Finance forecasting helps us determine how much financing is needed in the future given today's business decisions and growth.

A company that produces soap, shampoo, lotion, and other personal care products has recently taken a hit due to a competitor's new product line. The company decides to reduce wages for its labor force to save money while the company focuses on building up its reputation again, but the company's labor force goes on strike to protest the pay cuts. What type of risk does the strike represent? Non-diversifiable risk Systematic risk Market risk Idiosyncratic risk

Idiosyncratic risk Correct! Idiosyncratic risk is the same as firm-specific risk. Since the strike will most likely affect only this firm, it is a firm-specific risk.

How can the DuPont framework help a company assess its return on equity? It compares alternative ways of financing the firm with debt so the company can determine which will provide the highest return on equity. It allows the company to determine how its abilities to generate profits, manage assets, and use financing contribute to the return on equity. It breaks the cash flow of a company into the operating, investing, and financing aspects of the firm to help identify how each contribute to the firm's profitability. It provides a cross-sectional analysis of the industry for the firm to be able to compare its return on equity to that of its competitors.

It allows the company to determine how its abilities to generate profits, manage assets, and use financing contribute to the return on equity. Correct! The DuPont framework breaks the return on equity into each of these components using the profit margin, total asset turnover, and leverage ratio.

What is an advantage of using the NPV method? It tells the percent return on an investment. It calculates the dollar value that would be added to the firm by doing the project. It can be used to compare multiple projects when a firm faces capital constraints. It does not consider the time value of money.

It calculates the dollar value that would be added to the firm by doing the project. Correct! The NPV is expressed as a dollar amount, and the result of the NPV calculation is exactly how much value would be added to the firm from that specific project.

How does the PI aid in interpretation of the NPV? It communicates the value that would be lost to the company if it rejected the project. It does not take into account the initial outlay of the project, which makes the NPV easier to understand in comparison. It converts the NPV to a percentage, which is easier for management to understand. It gives an idea of the return generated by a project.

It gives an idea of the return generated by a project. Correct! The PI scales different-sized projects so that their returns are comparable.

Why is the sustainable growth rate (SGR) useful? It gives the maximum growth rate that allows a firm to maintain its current financial ratios without issuing new equity. It provides the firm with the necessary growth rate to maintain sales. It determines the discretionary financing needed. It demonstrates where discretionary financing should be sourced if it is needed.

It gives the maximum growth rate that allows a firm to maintain its current financial ratios without issuing new equity. Correct! The SGR is ROE times the plowback ratio, and it demonstrates the level of growth at which those ratios remain constant.

How does financial forecasting help with financial decision-making? It helps decision makers see a detailed map of the future performance of the firm. It helps decision makers understand the impacts of today's actions on the future performance of the firm. It helps managers understand what key assumptions to make for the future. It helps managers analyze how the firm has been performing over the past several years.

It helps decision makers understand the impacts of today's actions on the future performance of the firm. Correct! This is the purpose of financial forecasting.

Why is understanding the definition of finance important in managing personal finances? It helps individuals understand legal issues related to finance. It helps individuals compare the costs and benefits of an action to determine whether to take that action. It helps individuals act ethically with regard to finances. It allows individuals to find an investment with the highest return possible.

It helps individuals compare the costs and benefits of an action to determine whether to take that action. Correct! Any financial decision should make sense in terms of its costs and benefits.

What does a debt ratio of 40% indicate? It indicates that 40% of fixed assets are financed by debt. It indicates that 40% of assets are financed by debt. It indicates that 40% of total debt is long-term liabilities. It indicates that 40% of assets are financed by equity.

It indicates that 40% of assets are financed by debt. Correct! A debt ratio tells the portion of assets financed by debt.

What are three principles of budgeting that are important to know before beginning the budgeting process? Know yourself, reduce variance in spending, and consult a certified financial advisor Improve your credit score; understand the key areas of savings, income, and expenses; and categorize all expenses Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives Eliminate debt, evaluate your personal financial performance, and consult a certified financial advisor

Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectives Correct! All three of these principles are included in the six principles of budgeting as discussed in the course. The other three principles are know yourself; understand the key areas of savings, income, and expenses; and eliminate consumer debt and minimize long-term debt.

Jerry wants to begin budgeting his money. What are three principles that he should know before beginning the budgeting process? Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. Make eliminating consumer debt a priority, only use the budgeting strategies that are approved by GAAP, and track expenses categorically. Know yourself; transfer long-term debt to short-term debt; and develop savings, expense, and income strategies. Track expenses categorically, use the most updated method of budgeting, and eliminate consumer debt.

Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. Correct! These are three of the six principles of budgeting. The other three are know yourself; develop savings, income, and expense strategies; and use a method that meets your needs and objectives.

How do the benefits of knowing the cash position for each period differ between businesses and individuals? Knowing the cash position allows businesses to recognize when short-term loans are needed, while it allows individuals to analyze progress toward their personal financial goals. Knowing the cash position allows businesses to evaluate long-term cash accumulation, while it allows individuals to analyze loan balances. Knowing the cash position allows individuals to recognize when short-term loans are needed, while it allows business to know when to repay their vendors. Knowing the cash position allows businesses to know how much to invest each month, while it allows individuals to know how much to save each month.

Knowing the cash position allows businesses to recognize when short-term loans are needed, while it allows individuals to analyze progress toward their personal financial goals. Correct! Individuals do not usually (and should not) need short-term loans.

Unemployment rate is which type of economic indicator? Lagging Leading Coincident Concurrent

Lagging Correct! Lagging indicators change after the economy changes.

Which type of economic indicator is the consumer price index? Coincident indicator Lagging indicator Leading indicator Forecasting indicator

Lagging indicator Correct! CPI usually changes after the economy as a whole changes.

Yield curve is which type of economic indicator? Coincident Concurrent Leading Lagging

Leading Correct. Leading indicators change before the economy changes.

You are a financial manager of a company, and you have projected sales increase for next year of 8%. Which action would you take when you conduct financial forecasting using the percent of sales method? Change the long-term liabilities account in proportion to sales growth. Change the notes payable account in proportion to sales growth. Leave the cash account constant in the projected financial statements. Leave the notes payable account constant in the projected financial statements.

Leave the notes payable account constant in the projected financial statements. Correct! Notes payable is a discretionary account. Thus, you should leave it constant in the projected financial statements.

Which type of error would result in a set repercussion or penalty given by the government? Moral Spiritual Legal Ethical

Legal Correct! A legal error would result in a predetermined penalty by the government.

Which type of ratio is a current ratio? Market Solvency Liquidity Activity

Liquidity Correct! A current ratio is a liquidity ratio because it assesses whether a firm can meet short-term obligations.

Which type of ratio are suppliers interested in? Market ratios Profitability ratios Financing ratios Liquidity ratios

Liquidity ratios Correct! Liquidity ratios assess a firm's ability to meet short-term obligations to short-term creditors and suppliers.

What type of ratio is used to assess a firm's ability to meet short-term obligations without raising external capital? Liquidity ratios Profitability ratios Activity ratios Market ratios

Liquidity ratios Correct! Liquidity ratios measure a firm's ability to meet short-term obligations without raising external capital.

What is the purpose of monitoring your cash flows? Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. Monitoring is used to identify the degree to which a business is leveraged so that the business can determine when it will be most profitable to repay outstanding loans. Monitoring is the process by which firms prove to lenders that they have sufficient cash flow to pay back a short-term loan. Monitoring allows you to implement changes to your budget gradually in such a way that the changes go smoothly and efficiently.

Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. Correct! If a business did not monitor its budget, then tracking cash flows would be useless, and the business would not know if it was on track to reach its goals.

What is the difference between tracking and monitoring cash flows? Tracking involves using your monitoring record to verify cash flows against your goals, discover changes and patterns in cash flows, and understand when correction may be needed. Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed. Tracking involves using envelopes or computer programs to record cash flows, whereas monitoring involves evaluating cash flows by hand. Monitoring is revising your budget, whereas tracking is identifying patterns and changes in your cash flows.

Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed. Correct! By accessing cash flow records and knowing the remaining balance in the budget throughout the month and year, you will be able to monitor your budget in a way that will help you reach your financial goals.

Which processes help you identify and fix problems in your budget? Tracking allows you to identify problems, and then subsequent monitoring allows you to fix those problems. Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. When you spend too much in a category of your budget, you have identified a problem, which you can fix by increasing the allotted amount in that category for next month. Revision allows you to identify problems in your budget, and then tracking allows you to fix those problems immediately so that you can then monitor progress.

Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems. Correct! This assures that the budget is as effective as possible at helping you reach your financial goals.

Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? Moral Legal Ethical Standard

Moral Correct! Moral reflects one's beliefs about right and wrong, good and bad, or just and unjust.

Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing? Moral Ethical Legal Technical

Moral Correct! This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas's own sense of right and wrong.

Which Excel function should you use when you are finding a present value of uneven cash flows to find the PV in one step? NPV IRR FV PV

NPV Correct! You can use one NPV function to find the present value of uneven cash flows.

Nora is an investment manager, which means that she is paid to invest other people's money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma? Nora is considering investing in a risky asset just to meet her monthly goal. Nora is not explaining to her clients the riskiness of the specific investment. Nora is not currently meeting her goal for the month. Nora is uncertain about the outcome of the investment opportunity.

Nora is considering investing in a risky asset just to meet her monthly goal. Correct! Nora is caught between the obligation to meet her goal and the obligation to keep her clients' money safe. As an investment manager, she is obligated to do what is best for the client.

Which account is a discretionary account? Cash Notes payable Fixed assets Accounts receivable

Notes payable Correct! Notes payable does not vary with sales, and it is based on management discretion.

What does an average collection period of 70 tell you? On average, a firm turns over its accounts receivable 70 times a year. On average, a firm takes 70 days to pay accounts payable. On average, a firm takes 70 days to collect accounts receivable. On average, a firm takes 70 days to turn over its inventory.

On average, a firm takes 70 days to collect accounts receivable. Correct! This ratio tells on average how many days it takes for a firm to collect cash from accounts receivable.

Which description below correctly identifies one type of price risk? Operating risk—depends on the effect of the firm's operating decisions on its operating costs Business cycle risk—depends on how the firm is performing relative to its industry's leaders Default risk—depends on how much debt the firm has, which affects earnings and stock prices Financial risk—depends on the firm's ability to pay back its debt payments and dividend payments

Operating risk—depends on the effect of the firm's operating decisions on its operating costs Correct! This is the correct description of operating risk.

What is a component of the required rate of return? Opportunity cost Simple interest Hurdle rate Compound interest

Opportunity cost Correct! The required rate of return is composed of opportunity cost, risk, and inflation.

What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? Perpetuity Annuity due Ordinary annuity Single sum

Ordinary annuity Correct! This is the definition of an ordinary annuity. The keys are "at the end of each period," "fixed period," and "equal payments."

You are calculating the lump sum of money needed now in order to withdraw $10,000 a year over the next 5 years from an account that earns a 3% interest rate. Which Excel function should you use? NPER function RATE function FV function PV function

PV function Correct! Since you are looking for a relative past value of future cash flows, you should use the PV function in Excel.

Which financial institution invests funds contributed by a company to provide retirement funds for the company's employees? Central bank Insurance Pension fund Mutual fund

Pension fund Correct! This is the role of pension funds.

Which type of financial institution deals mainly with providing for retirement through employers? Pension fund Investment bank Mutual fund Credit union

Pension fund Correct! Through employers, individuals can contribute to pension funds, which then invest their money in the market to provide retirement funds.

Which financial institution specializes in managing and administering retirement funds? Private equity Mutual funds Pension funds Investment banks

Pension funds Correct! Pension funds specialize in retirement funds.

What is the difference between return on assets (ROA) and return on equity (ROE)? ROA considers the liquidity of a company, while ROE does not. ROA considers asset use efficiency, while ROE does not. ROE considers the capital structure of a company, while ROA does not. ROE considers the profitability of a firm, while ROA does not.

ROE considers the capital structure of a company, while ROA does not. Correct! DuPont framework tells youthat ROE is ROA times leverage multiplier. The leverage multiplier represents the capital structure of the company.

Lolo invested $30,000 today in an account that gives 3% interest. Starting one year from today, she will be able to pull out little over $3,500 a year. What does the $30,000 represent? Present value Annuity Future value Perpetuity

Present value Correct. The $30,000 is invested before any cash flows, so it is a relative past cash flow. Therefore, this is the present value.

What happens to prices in a market in which there is inflation? Prices fall. Prices remain the same. Prices rise. Prices fluctuate from day to day, sometimes increasing and sometimes decreasing.

Prices rise. Correct! Prices rise because of increase in demand, increase in cost of goods, and adaptive expectations.

In which type of market would a company issue bonds or stocks for the first time? Secondary market Primary market Money market Dealer market

Primary market Correct! This is the purpose of a primary market.

A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? Dealer market Primary market Secondary market

Primary market Correct! When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market. Futures and options market

How should you go about making changes to your budget? Prioritize the changes you want to make and then implement them gradually one by one to make sure they work. Make a few changes at a time, grouping them together by how much profit they are likely to bring you. Implement every possible change you can think of as soon as you can so that you don't lose any profits due to an inefficient budget. Carefully evaluate the changes you want to make and then implement them all simultaneously so that your budget is the most effective it can be as soon as possible.

Prioritize the changes you want to make and then implement them gradually one by one to make sure they work. Correct! Revising your budget in this way will help changes go smoothly and help your company or family members become familiar with the changes.

Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? Private equity Corporate finance Insurance Financial planning

Private equity Correct! Private equity deals with investments in firms that are privately held and whose ownership is not yet bought or sold on any public stock exchange.

Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? Mutual fund Credit union Commercial bank Private equity

Private equity Correct! This is the role of a buyout private equity firm.

Which capital investment evaluation method is presented as a ratio? Internal rate of return (IRR) Net present value (NPV) Profitability index (PI) Quick ratio

Profitability index (PI) Correct! The PI is the ratio of discounted benefits to discounted costs.

A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the industry benchmark. To achieve this goal, costs were cut in production through an investment in efficient equipment, and the company achieved a higher profit margin. If this continues, you are certain that the firm will achieve its goal in two years. What is this an example of? Trend analysis Flexibility Cross-sectional analysis Progress measurement

Progress measurement Correct! You are comparing the company's ratio to the goal and checking how the company is progressing toward the goal.

How can you use the envelope method of budgeting to monitor cash flows? Use Excel to record all of your income, savings, and expenses. Put the amount of money budgeted for each category of your expenses into labeled envelopes and then spend the money in each envelope on expenses in that category. Put cash equal to the total sum of your expenses in one envelope, use that cash for all your expenses, and then write down what you spent it on. Connect budgeting software to your financial accounts.

Put the amount of money budgeted for each category of your expenses into labeled envelopes and then spend the money in each envelope on expenses in that category. Correct! This method will help you plan and monitor your cash flows.

Which type of account changes with sales growth? Fixed assets accounts Spontaneous accounts Non-spontaneous accounts Discretionary accounts

Spontaneous accounts Correct! Spontaneous accounts vary naturally with sales.

You are a financial manager of a company. The marketing department has informed you that the projected sales growth for the upcoming year is 15%. As you conduct financial forecasting, you increase cash, accounts receivable, and inventory accounts by 15%—the same as the projected sales growth. What type of accounts are these? Spontaneous accounts Non-spontaneous accounts Discretionary accounts Fixed assets accounts

Spontaneous accounts Correct! Spontaneous accounts vary naturally with sales. Since they increase proportionally with sales growth, they are examples of spontaneous accounts.

What is used to measure total risk? Beta Bond ratings Standard deviation Holding period return

Standard deviation Correct. Standard deviation is used to measure the total risk of securities.

How does the amount of time affect the risk associated with different investment vehicles? Treasury bills are more risky over a longer period of time than over a short period of time. Stock investments are more risky over a shorter period of time than over a longer period of time. Time does not affect the level of risk associated with each investment vehicle. Corporate bonds are riskier over time because it is uncertain whether the company will be around that long.

Stock investments are more risky over a shorter period of time than over a longer period of time. Correct! Time diversification refers to the idea that stock investments are more risky over a shorter period of time than over a longer period of time.

Why might a firm prefer to raise debt capital through stocks instead of bonds? Stocks do not require a firm to give up any ownership. Stocks provide a steady stream of income to a firm. Stocks do not allow investors to have voting rights. Stocks do not require the firm to repay the par value to investors.

Stocks do not require the firm to repay the par value to investors. Correct! Stocks are shares of ownership in a firm, so the value of the stock is not required to be returned to investors.

What is one way that a firm can improve its return on equity? Hiring more employees for the accounting department to implement a multiple check system Improving loan relations by ensuring that it meets debt covenants Successfully cutting production costs to boost net margin Increasing the number of trainings it gives management

Successfully cutting production costs to boost net margin Correct! Increasing net margin increases the ROE.

What indicates to a firm that a project will increase shareholder wealth? The NPV is positive. The NPV is negative. The project's cash flows are projected closer to the present. The project's cash flows are projected far into the future.

The NPV is positive. Correct! The NPV is an estimate of the dollar amount that would be added to the firm's value as a result of the investment.

What does the term ethical refer to? An idea or thing used as a measure, norm, or model in comparative evaluations Following the laws and rules set by an authority One's beliefs about right and wrong, good and bad, or just and unjust The accepted standards of conduct that guide a person's behavior

The accepted standards of conduct that guide a person's behavior Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior.

What is discretionary financing needed (DFN)? The additional financing needed given a firm's expected future growth The total projected assets needed given a firm's expected future growth The total projected liabilities needed given a firm's expected future growth The additional projected owners' equity needed given a firm's expected future growth

The additional financing needed given a firm's expected future growth Correct! DFN is how much additional financing the firm will need given its expectations for future growth.

What does the net margin measure? The percent of sales remaining after covering COGS and operating expenses The percent earned on each dollar invested in the firm The percent of revenue that is retained as profit for the firm The percent of revenue remaining after COGS has been taken out of sales

The percent of revenue that is retained as profit for the firm Correct! The net margin is net income divided by sales, which tells us how much a firm actually gets to keep after paying all its expenses.

Why is the IRR a poor valuation method for a project with unconventional cash flows? Projects with unconventional cash flows are only possible to evaluate using trial and error, which is not an acceptable way to calculate the IRR. There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell which IRR is the correct one. The hurdle rate is always too large for projects with unconventional cash flows. The IRR method can be used only to calculate projects that add value to a firm, and projects with unconventional cash flows never add value to a firm.

There are multiple sign changes in the calculation resulting in multiple IRRs, and it is impossible to tell which IRR is the correct one. Correct! Projects with unconventional cash flows must be valued using NPV.

Why would a long-term investment require a higher rate of return? Regulations require a higher rate of return on long-term investments. Projects with longer lives always produce a very high return There is greater risk involved and a higher opportunity cost. There is less risk involved and a lower opportunity cost.

There is greater risk involved and a higher opportunity cost. Correct! There is greater risk because you cannot ensure the return of your investment for a longer period of time, and there is a higher opportunity cost because you cannot use that money for other things for a longer period of time.

In what way are coincident indicators useful? They help investors know which sectors of the economy to invest in. They are used to predict future economic trends so that recessions can be avoided. They are analyzed during economic shifts to provide information about the current state of the economy. They are useful in conjunction with GDP and personal income to predict the future health of the economy.

They are analyzed during economic shifts to provide information about the current state of the economy. Correct! Coincident indicators help analysts see the big picture of economic trends.

Why are ratios useful for analyzing and comparing company performance between firms of different sizes? They provide flexibility. They allow for performance evaluation. They provide standardization. They help us focus.

They provide standardization. Correct! Ratios standardize financial data to make them comparable across firms, even those of distinctly different sizes.

How do insurance companies pay policyholders when a claim is made? They withdraw funds from policyholders' premium accounts. They use returns from stocks and bonds. They withdraw funds from their corporate savings account. They raise premiums for everyone who filed a claim during the year.

They use returns from stocks and bonds. Correct! Insurance companies invest the money that they earn from premiums into stocks and bonds, and then the returns are used to fill claims.

The firm Betsy's Books has a market-to-book ratio of 1.2. What does this tell you about the firm? This firm is about to go out of business. This firm gets a 20% return on its assets. This firm gets an 20% return on investment. This firm is expected to grow in the future.

This firm is expected to grow in the future. Correct! The market-to-book ratio measures the growth prospects of a company. If the ratio is greater than 1, then the company is expected to grow.

Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? Loosen the credit standards for its customers. Pay suppliers more quickly. Tighten the credit standards for its customers. Pay suppliers more slowly.

Tighten the credit standards for its customers. Correct! The credit standards are too loose, so the customers are not paying Firm A as quickly as they are paying other competitors in the industry. Tightening the credit standards would shorten the average collection period.

What is the name for the concept that a dollar today is worth more than a dollar in the future? Time value of money Ordinary annuity Perpetuity Cost of capital

Time value of money Correct! The time value of money is the concept that today's dollar is worth more than a dollar in the future.

What is the primary role of financial institutions? To conduct financial transactions such as investments, loans, and deposits To provide financial information to the stakeholders of a business To provide liquidity when trading financial assets To deal with financing, capital structuring, and investment decisions

To conduct financial transactions such as investments, loans, and deposits Correct! Financial institutions conduct transactions to circulate money.

What is the purpose of a monthly cash budget? To ensure that you have enough cash each month to pay your fixed expenses To have documentation for tax and lending To know how much cash you spend on both a monthly and yearly basis so you can determine how much you have left over to invest To control cash inflows and outflows so you can balance income with expenditures and savings

To control cash inflows and outflows so you can balance income with expenditures and savings Correct! Controlling cash inflows and outflows allows you to use your money in the most effective way possible.

What is one of the fundamental purposes of financial forecasting? To ensure that the future period's sales and costs will not exceed historical numbers To create accurate financial reports that summarize the company's financial performance for the previous period To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm To understand the link between asset requirements and industry

To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm Correct! A solid financial model will allow you to see how changes in cost structures or sales growth will impact the firm's future cash flows, financing needs, and cash budgeting.

For what purpose are market ratios used? To evaluate the current share price of a public firm's stock To consider how a firm is financed To measure how well a company uses its assets to generate sales or cash To assess a firm's ability to meet short-term obligations without raising external capital

To evaluate the current share price of a public firm's stock Correct! Market ratios are used to evaluate whether the current share of a public firm's stock is correctly priced.

What is the major purpose of financial forecasting? To inform a company how business decisions will impact future growth To show the company's growth over the past several years To make operational changes within a company To produce a short-term budget for a company or individual

To inform a company how business decisions will impact future growth Correct. Financial forecasting helps decision makers understand how actions taken today can impact the firm's future performance.

Why might a manager manipulate accounting procedures? To restrict a firm from taking on risky projects To spend capital on wasteful projects To maximize shareholder wealth To make the company's performance look good

To make the company's performance look good Correct! A manager might manipulate accounting procedures to inflate the earnings of a company, which would optimize bonuses and stock-price-related benefits for management.

Maria and Mateo are setting financial goals. They decide that they need to save $200 each month to reach their goal of taking their children to visit their grandparents in Spain next summer. What is the objective of setting such a goal? To set priorities in personal finances To minimize personal expenses To make personal finances predictable To maximize individual utility

To maximize individual utility Correct! While everyone has different personal financial goals, the objectives of such goals is to maximize individual utility.

What is the main objective of personal financial goals? To maximize owner wealth To maximize individual utility To maximize stock investments To maximize charity donations

To maximize individual utility Correct! You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.

The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? To increase the size of the Federal Reserve To obtain a positive return for its private investors To regulate inflation and unemployment To reduce the amount of outstanding debt owed by U.S. citizens

To regulate inflation and unemployment Correct! Regulating inflation and unemployment is the main objective of the Federal Reserve and central banks, and it is accomplished by adjusting the interest rate.

What is the goal of financial forecasting? To project net income and dividends for a firm To provide a detailed map of a firm's future To project sales so investors can adjust stock prices To understand the implications of today's decisions on tomorrow's performance

To understand the implications of today's decisions on tomorrow's performance Correct! The goal of financial forecasting is to see the big picture of how financial decisions will affect future performance.

What three things should an individual or company be doing so that their budget is effective and so that they are on track to meet their financial goals? Revise the budget, categorize investments, and track income Monitor cash flows, reduce variable costs, and track expenses Track cash flows, monitor cash flows, and revise the budget Reduce variable costs, account for income, and monitor outstanding loans

Track cash flows, monitor cash flows, and revise the budget Correct! Doing these things helps you to use your money in the most efficient and effective way possible.

What is the main reason why it is important to track and record cash flows? Tracking cash flows is important because it is impossible to refinance a loan without tracking your income and expenses. Tracking your cash flows allows you to increase your annual income by knowing your previous income. Tracking cash flows is the main process by which a person can calculate the return they are receiving on their investments. Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed.

Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed. Correct! This is the first step in the budgeting process, and it is necessary in order to have an accurate budget going forward.

Which method of ratio analysis looks at a firm's performance over time? Progress measurement Cross-sectional analysis Trend analysis Focus

Trend analysis Correct! Trend analysis looks at a firm's financial ratios over time.

Which statement correctly identifies the relationship between systematic risk and different types of firms? Luxury companies have high systematic risk because as the market moves up and down, more people will invest in their stocks and bonds. Luxury good providers have low systematic risk because as the market moves up and down, their level of risk will also move up and down but in a diminished way. Utility companies have high systematic risk because as the market moves up and down, more people will invest in their stocks and bonds. Utility companies have low systematic risk because as the market moves up and down, their level of risk will also move up and down but in a diminished way.

Utility companies have low systematic risk because as the market moves up and down, their level of risk will also move up and down but in a diminished way. Correct! Different firms have different levels of systematic risk.

Which term is used to describe the stock of a firm with market-to-book ratio of less than 1? Growth stock Undervalued Overvalued Value stock

Value stock Correct! An M/B ratio of less than 1 is considered a value stock.

When evaluating a company's performance, what can variances on a company's cash budget indicate? Variances show that expenses were necessarily greater than income for the budget horizon. Variances show that certain managers or divisions are not meeting targets. Variances are expected and should never pose a concern for management. Variances are not useful for performance evaluation of certain managers or divisions.

Variances show that certain managers or divisions are not meeting targets. Correct! Cash budgets provide a basis for performance evaluation, and significant variance from predicted income, saving, and expense predictions indicates that management has not accurately assessed company operations.

What do leverage ratios describe? How efficiently a firm is using its assets How easily a firm can convert assets into cash What proportions of equity and debt a firm uses to finance its assets What return shareholders will earn on their investment in a firm

What proportions of equity and debt a firm uses to finance its assets Correct! This information gives insight into the financial structure of a firm.

In what situation might the software method of tracking be preferable to the spreadsheet method of tracking? When a person has a lot of free time and likes to record each cash flow by hand When a person needs cash flow information for tax purposes When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases When a person prefers to use cash to make purchases and is very good about remembering to track cash flows

When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases Correct! The software method is convenient for busy people who do not want to use cash or record cash flows by hand.

In which situation would a firm need to borrow cash? When the firm's cash receipts are negative When the minimum cash balance for the period has been met, but the firm wants to make sure it has enough cash to cover the beginning cash required for next month When the net cash balance is less than or equal to zero When the beginning cash balance plus the net cash is less than the minimum cash balance required for the month

When the beginning cash balance plus the net cash is less than the minimum cash balance required for the month Correct! This indicates to a firm that additional financing will be needed during the period to operate effectively.

What is the envelope method of budgeting? Tracking your credit and debit expenditures by updating and categorizing purchases that appear on your bank statement Using a spreadsheet to track both your digital and physical expenditures of cash during the month Withdrawing cash at the beginning of the period and then allowing only a certain amount to be available for each category of spending Paying all expenses during the month by check through the physical mailing system to ensure that obligations are met in a timely manner

Withdrawing cash at the beginning of the period and then allowing only a certain amount to be available for each category of spending Correct! The envelope method involves putting a specific portion of your budget in cash in each envelope and only spending this amount during the period.