Financial Management C214 Review plus Pre-Assessment (no math)questions and answers + detailed rationales

False

Trading on the NYSE is executed without a specialist (i.e. a market maker).

True

Stocks and bonds are two types of financial instruments

Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized

The matching principle in accrual accounting requires that:

Assets = Liabilities + Equity

A basic equation for the balance sheet is:

Because the other statements are reset at the end of the fiscal year

Why is the Balance Sheet known as a permanent statement?

Net Income - Dividends

How do you calculate the change in Retained Earnings?

Operating Income and EBIT are the same

Which of the following is generally true?

Cash Accounts Receivable, Inventory, Long Term Assets

Which components are part of total assets?

Inventory, Cash, Accounts Receivable, Short Term Investments

Which components are part of current assets?

Bonds, Accounts Payable, Mortgage

Which components are part of Total Liabilities?

Cash decreases

When Fixed Assets increase what happens to Cash?

explains the change in cash balance for one period of time

Which is the purpose of the statement of cash flows?

The firm has too little inventory resulting in lost sales or stock-outs.

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely?

higher

If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio?

EBIT, Total Assets

The OIROI (Operating Income Return on Investment) uses what elements on the income statement?

How efficient assets are at producing sales

Why would a company be interested in the TAT(Total Asset Turnover) ratio?

Price is lower with additional compounding periods

You are contemplating buying an annual bond or a semi-annual bond. Is there any difference in the price if the bond has the same data: 1,000 face value with a 4% coupon rate. The bonds mature in 5 years having identical YTMs of 4.8%. Why is there a price difference?

Not Buy - The calculated price is too low

One of your friends is recommending a stock if it sells for more than $165.00 per share. The growth rate is 4% and the latest dividend was $6.00. You are expecting an 11% return. Why should you buy or not buy the stock?

Beta Coefficient

If an investor knows the idiosyncratic risk, the investor knows the:

Because depreciation expense is tax deductible

Why is depreciation expense taken out of the net income calculation, yet added back at the end?

It measures the dollar value, It is more reliable

Why is the NPV preferred over the IRR? Pick Two

Higher leverage leads to higher profitability for a given sales level

When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability?

The reliance on debt

What does the Degree of Financial Leverage indicate?

Higher profits to shareholders

If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile?

The amount of time to regenerate cash

What is the cash cycle?

To time cash expenditures

Why is float important to understand?

Collect quickly and pay slowly

What should a company do to manage its working capital?

Company B invests in more working current assets

Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply?

Increased float indicates slower processing time

Which of the following characterizes collection float

Company B might have higher inventory turnover

Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint?

Paying off A/P on the last day due is good policy

In regards to Accounts Payable balances, which of the following is true:

Building Appraisal

What would be a source of information to determine Replacement Cost?

The value of Company Z is higher

If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company?

Banking Industry

Dodd-Frank regulates which segment of the U.S. Economy?

Register all public offerings, Regulates stock sales

The SEC Securities & Exchange Commission requires companies to do the following: (pick two)

Have internal control audits

What does the Sarbanes-Oxley Act require companies to do?

Prosecutes naughty stock brokers

FINRA (Financial Industry Regulatory Authority) does the following: (pick one)

International competition

If a product is made 100% domestically, what can affect its domestic market?

Profits go up and domestic employment decreases.

If a company makes its product in a foreign country where labor costs are much lower, what happens?

Decreases

If the value of a dollar increases, the price of imports:

To reduce currency risk

Why would a farmer buy a hedge when he signs a contract to sell produce overseas?

Increasing sales prices, Altering capacity

Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available?

Company A has lower risk than Company B.

Company A has a degree of operating leverage of 1.85, and Company B has a degree of operating leverage of 6.5.

What does the degree of operating leverage say about these two companies?

By making decisions that keep the control of the business with the owners

How can a private firm appropriately maximize shareholder value?

Because international investing in a global marketplace is the concern of

American investors

Why are American regulators focused on international investing in a global marketplace?

Bonds

What is one of the two basic types of financial instruments?

Consumer prices will decrease and Domestic employment will decrease.

If a company outsources the manufacturing of its products to a foreign country, what are the likeliest

outcomes?

It reports the assets, liabilities, and equity at a point in time.

What is true about the content and structure of a balance sheet?

The change will decrease cash flows from operations by $5,000.

A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this

amount is expected to be collected next period.

How will this change in accounts receivable affect the cash flows from the operating activities section?

Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.

Which statement accurately explains the recognition of revenues and expenses under accounting income

and income for tax purposes?

A firm's purchase and sale of long-term assets

What do cash flows from investing activities generally relate to?

Cash sales to customers

Which transaction is reflected in cash flow from operating activities?

Cash available for distribution after funding required reinvestment

What does free cash flow represent?

The firms have different fiscal years.

An analyst is comparing the ratios of two firms and needs to address timing differences. What would be considered an example of a timing difference between the two firms?

The firm is generating higher returns to owners than the industry.

A firm has a ROE (return on equity) of 0.27 and the industry average ROE is 0.24. Which conclusion would an analyst draw when comparing the firm to the industry?

The product must have been delivered.

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules?

The sum of money that the corporation promises to pay upon expiration of the bond.

What is the par value (face value) of a bond?

The current price of the stock is 25% below its intrinsic value.

A broker is considering purchasing common stock in a company that has average but consistent operating

performance.

Which factor should lead the broker to purchase shares in this company?

Quadrant 4, bottom left, 3/4 to right side. Also E. for answer.

Which investment option is less desirable for a prudent investor?

When the market interest rates fluctuate, the required rate of return equals the bond coupon rate.

Which statement is true about fluctuations in bond prices?

Municipal bonds

Which securities are issued by local governments and are usually tax exempt at the federal level?

Lower than the coupon rate

A bond that matures in 30 months is sold at a premium.

What is the yield to maturity (YTM)?

None of the principle is repaid until the bond matures.

Why does a long-term bond resemble an interest-only loan?

Any time the number of compounding periods is greater than annual.

Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate

(APR)?

Skipping a declared preferred stock dividend results in dividends in arrears.

What is the difference between a common stock and a preferred stock?

Risk decreases at a slower rate.

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

C1 - Three up vertical on the graph curve and also that would be on the most arched part of the graph.

Where along this line will a highly risk-averse investor likely fall?

CAPM provides a way to determine the expected return for stocks. & CAPM provides a way to estimate the required return.

What are two primary benefits of the capital asset pricing model (CAPM)?

Increase sales prices and Alter capacity

Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available?

Accept when the project return is greater than the required return.

What is the acceptance criteria when using internal rate of return to evaluate a project?

CAPM considers risk of a stock relative to the market to determine expected

return.

What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

Less money dedicated to financing means more money is available for production and operations.

Why do companies strive for a lower cost of capital?

Projected total assets − projected total liabilities + projected owner's equity

How is the amount of discretionary financing that is needed by a firm determined?

Annual cash flows for the life of the new project., Cash flow when the firm terminates the project., & The initial cost of the new project.

Which three pieces of data are needed to perform a capital budget analysis?

The cost of a market study conducted prior to the decision and The cost of feasibility consulting incurred before the decision point.

What are two examples of sunk costs?

Setting credit terms.

Which action is an important part of managing accounts receivable?

It makes it possible to meet the demands of customers.

What is the main benefit associated with holding inventory?

Market value

A person needs to determine the costto replace a company's property, plant, and equipment using the replacement cost method.

Which value does this person need to consider in order to make this determination?

Index funds

Which type of investment will a risk-averse investor most likely invest in?

It will result in a greater percentage decrease in Company Y's pre-tax profit.

Company Y has a greater degree of financial risk than Company Z.

What will happen if there is a 1% decrease in EBIT for both companies?

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.

How does the anticipation of bankruptcy affect a firm's capital structure?

Debt financing provides interest tax benefits.

Why would a company prefer to raise capital by issuing debt instead of issuing new equity?

Preferred stock

Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets?

The cost of debt will decrease.

How will an increase in corporate tax rates affect a firm's cost of capital?

Accounts receivable turnover

Which financial ratio is used to measure a company's effectiveness in extending credit as well as collecting

debts?

To provide liquidity

What is the reason for holding cash and cash equivalents?

Operating balance

Which term describes the amount of cash a firm needs in order to pay its immediate bills?

By requiring public disclosure of information about entities that sell public equity or debt.

How does the Securities Exchange Commission (SEC) regulate the financial industry?

Disclosure of off-balance sheet debts.

Which company control is required by the Sarbanes-Oxley Act?

Prospectus

Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?

Sales practices

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and Securities and Exchange Commission (SEC)?

Financial institutions becoming too big to fail.

What did the Dodd-Frank Act seek to prevent?