C214 financial management PVCC

FINANCIAL MANAGEMENT PVCC

How can a private firm appropriately maximize shareholder value?

YOUR ANSWER	CORRECT ANSWER
By increasing the firm’s stock price
By reducing the firm's labor
By making decisions that keep the control of the business with the owners

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

YOUR ANSWER	CORRECT ANSWER
Because international investing in a global marketplace is the concern of American investors
Because an exclusively domestically focused regulatory approach is still effective
Because weaving international concerns into domestic policy is cost-effective
Because other jurisdictions have the same priorities and solutions as the U.S.

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

YOUR ANSWER	CORRECT ANSWER
Checking accounts
Bonds
Euros
Hedge funds

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

Choose 2 answers

YOUR ANSWER	CORRECT ANSWER
Consumer prices will decrease.
Tariffs will decrease.
Domestic wages will increase.
Production capacity will decrease.
Domestic employment will decrease.

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

YOUR ANSWER	CORRECT ANSWER
It reports the gains and losses at a point in time.
It reports the revenues and expenses for a period of time.
It reports the assets, liabilities, and equity at a point in time.
It reports the expenses, assets, and liabilities for a period in time.

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?

YOUR ANSWER	CORRECT ANSWER
The change will decrease cash flows from operations by $2,500.
The change will increase cash flows from operations by $2,500.
The change will increase cash flows from operations by $5,000.
The change will decrease cash flows from operations by $5,000.

Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?

YOUR ANSWER	CORRECT ANSWER
Revenue and expenses recognized must be matched with assets.
Revenue and expenses recognized must be matched with liabilities.
Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.
Revenues and expenses are always recognized in the same period for accounting income purposes and income for tax purposes.

Selected Data for 20x2 for ABD Inc.
Net income	$ 1,000
Depreciation expense	$ 300
Change in operating assets	$ 600
Change in net property, plant, and equipment	$ 5,000
Changes in long-term liabilities	$ 1,000
Dividends paid	$ 200

What is the firm’s cash flow from investments, using the data above and assuming no asset disposals?

YOUR ANSWER	CORRECT ANSWER
$5,000 inflow
$5,000 outflow
$5,300 inflow
$5,300 outflow

What is the basic equation for a balance sheet?

YOUR ANSWER	CORRECT ANSWER
Revenue + expenses = income
Assets = Liabilities − Equity
Revenue + Assets = Equity
Assets = Liabilities + Equity

10.

What do cash flows from investing activities generally relate to?

YOUR ANSWER	CORRECT ANSWER
A firm’s debt and equity transactions
A firm’s purchase and sale of long-term assets
A firm’s sale of goods and services
A firm’s non-cash transactions

11.

Which transaction is reflected in cash flow from operating activities?

YOUR ANSWER	CORRECT ANSWER
Amortization expense
Gain or loss on the sale of property, plant, and equipment
Credit sales to customers
Cash sales to customers

12.

What does free cash flow represent?

YOUR ANSWER	CORRECT ANSWER
Cash flows from operating activities
Cash balance at the end of the period
Cash available for distribution after funding required reinvestment
Cash available for dividends

13.

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?

YOUR ANSWER	CORRECT ANSWER
The firms have different fiscal years.
The firms are in different industries.
The firms use different depreciation methods.
The firms use different inventory methods.

14.

A company’s year-end balance sheet for 2013 shows the following:

Accounts receivable: $900
Inventory: $1200
Fixed assets: $1000
Accounts payable: $1300
Sales: $4000
Salaries expense: $275

What is their fixed asset turnover ratio?

YOUR ANSWER	CORRECT ANSWER
1.7
1.8
3.7
4.0

15.

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?

YOUR ANSWER	CORRECT ANSWER
The firm is generating higher returns to owners than the industry.
The firm is generating lower returns to owners than the industry.
The firm should use more equity financing.
The firm should use less equity financing.

16.

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

YOUR ANSWER	CORRECT ANSWER
The firm must have been paid for the product.
The product must have been delivered.
The price of the product must have included sales tax.
The price of the product must have been exempt from sales tax.

17.

A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually).

How much will the teacher have in principal and interest at the end of the 5 years?

YOUR ANSWER	CORRECT ANSWER
$120,000
$121,551
$121,665
$125,000

18.

An accountant is 40 years old with an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement.

How much will the accountant have upon retirement, if the accountant is able to earn 4% annually on this investment?

YOUR ANSWER	CORRECT ANSWER
$180,000
$336,510
$349,970
$442,000

19.

An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end of the tenth year.

What is the investor’s future balance after 10 years?

YOUR ANSWER	CORRECT ANSWER
$24,012
$24,973
$26,012
$26,973

20.

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

YOUR ANSWER	CORRECT ANSWER
The interest accrued on the bond through expiration
The sum of money that the corporation promises to pay upon expiration of the bond
The transaction costs associated with bond issuance
The coupon yield of the bond

21.

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?

YOUR ANSWER	CORRECT ANSWER
A recent buying frenzy has driven the current price 50% higher than the previous trailing 12-month high price.
The current price of the stock is 25% below its intrinsic value.
The broker receives a tip that the company is about to announce a market breakthrough, and the price is above intrinsic value.
Intrinsic value is 25% below the current stock price.

22.

A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex dividend date is not a consideration, the broker will receive the full $2.25), and the broker expects a 12% rate of return

What is the highest price the broker should be willing to pay for the stock?

YOUR ANSWER	CORRECT ANSWER
$33.89
$34.01
$34.15
$38.25

23.

A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year.

What is the expected return per year?

YOUR ANSWER	CORRECT ANSWER
12.2%
14.9%
15.7%
17.0%

24.

The figure below represents the levels of market efficiency:

Which investment option is less desirable for a prudent investor?

YOUR ANSWER	CORRECT ANSWER
A
B
C
D
E

25.

The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years.

What is the value of the bond?

YOUR ANSWER	CORRECT ANSWER
$748
$1,000
$1,200
$1,548

26.

Which statement is true about fluctuations in bond prices?

YOUR ANSWER	CORRECT ANSWER
When market interest rates fluctuate, the bond coupon rate is unchanged.
When market interest rates are stagnant, the bond coupon rate fluctuates.
When market interest rates fluctuate, the bond coupon rate fluctuates.
When the market interest rates fluctuate, the required rate of return equals the bond coupon rate.

27.

A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually.

What is the yield to maturity (YTM) on the company’s bonds?

YOUR ANSWER	CORRECT ANSWER
12.46%
10.00%
3.53%
7.06%

28.

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

YOUR ANSWER	CORRECT ANSWER
Treasury bonds
Corporate bonds
Foreign bonds
Municipal bonds

29.

A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090.

What is the yield to maturity for this bond?

YOUR ANSWER	CORRECT ANSWER
3.80%
4.28%
5.00%
6.31%

30.

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

What is the yield to maturity (YTM)?

YOUR ANSWER	CORRECT ANSWER
Higher than the coupon rate
Equal to the coupon rate
Lower than the coupon rate
Not enough information to determine YTM

31.

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

YOUR ANSWER	CORRECT ANSWER
A portion of the principle is repaid monthly.
None of the principle is repaid until the bond matures.
All the principle is repaid before the bond matures.
Interest accrues and is paid when the bond matures.

32.

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

YOUR ANSWER	CORRECT ANSWER
Any time the number of compounding periods is greater than annual.
Any time the number of compounding periods is exactly 1.0.
Any time the effective annual rate equals the APR.
Any time the stated nominal rate equals the APY.

33.

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

YOUR ANSWER	CORRECT ANSWER
Common stock has no fixed maturity, and a preferred stock has a fixed maturity.
Common stock has fixed maturity, and a preferred stock does not have a fixed maturity.
Skipping a declared preferred stock dividend results in dividends in arrears.
Skipping a common stock dividend means a preferred stock dividend may not be paid.

34.

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

YOUR ANSWER	CORRECT ANSWER
There is a linear decrease in risk.
Risk decreases at a slower rate.
All risk can be diversified away.
Risk remains constant.

35.

The figure below represents a portfolio that plots the expected return against the risk of each investment.

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

YOUR ANSWER	CORRECT ANSWER
A1
C1
D2
D3

36.

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

Choose 2 answers

YOUR ANSWER	CORRECT ANSWER
CAPM provides a way to forecast actual return for stocks.
CAPM provides a way to determine the expected return for stocks.
CAPM provides a way to estimate the required return.
CAPM provides a way to adjust a portfolio to a market beta of one (1).

37.

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity.

What is the company's weighted average cost of capital?

YOUR ANSWER	CORRECT ANSWER
6.5%
7.2%
8.8%
9.7%

38.

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

Choose 2 answers

YOUR ANSWER	CORRECT ANSWER
Increase sales prices
Alter capacity
Increase dividend payouts
Increase costs

39.

Partial financial data for a company is as follows:

Assets: $10,000,000
Liabilities: $4,000,000
Equity: $6,000,000
Sales: $25,000,000
Net income: $5,000,000
Profit margin: 20%
Dividends: $500,000
Dividend payout ratio: 10%
ROA: 50%
ROE: 83%

What is the sustainable growth rate for the company?

YOUR ANSWER	CORRECT ANSWER
20%
50%
75%
83%

40.

A machine will reach the end of its useful life in Year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company’s marginal tax rate is 34%.

What is the tax implication on the sale of the new machine at Year 5?

YOUR ANSWER	CORRECT ANSWER
Tax shield of $33,000
Tax liabilities of $33,000
Tax shield of $17,000
Tax liabilities of $17,000

41.

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

YOUR ANSWER	CORRECT ANSWER
Accept when the project return is greater than the required return
Accept when the required return is greater than the project return
Accept when the internal rate of return equals the net present value
Accept when the net present value is positive

42.

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years.

How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return?

YOUR ANSWER	CORRECT ANSWER
$11,047
$23,015
$24,393
$10,248,724

43.

A company has a market value of $500 million.

It has a market value of equity of $200 million, a market value of long-term debt of $150 million, and a market value of short-term debt of $150 million.

The cost of equity is 12%, the cost of long-term debt is 8%, and the cost of short-term debt is 6%. The marginal tax rate is 35%.

What is the weighted average pre-tax cost of capital (WACC) for this company?

YOUR ANSWER	CORRECT ANSWER
8.37%
9.00%
7.53%
8.16%

44.

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

YOUR ANSWER	CORRECT ANSWER
CAPM does not rely on an estimate of the market risk.
CAPM is tied to relative market risk, which provides a less reliable estimate growth.
CAPM considers risk of a stock relative to the market to determine expected return.
The relative market risk is always constant.

45.

Why do companies strive for a lower cost of capital?

YOUR ANSWER	CORRECT ANSWER
Less money dedicated to financing means more money is available for production and operations.
More money dedicated to financing means more money is available for production and operations.
A lower cost of capital positively affects credit rating.
A lower cost of capital means a higher debt-to-equity ratio.

46.

A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and PP&E will be 55% of projected sales. Accounts payable are estimated to be 12% of projected sales. Owners’ equity is $34 million. Long-term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital.

What is the amount of discretionary financing needed?

YOUR ANSWER	CORRECT ANSWER
$8 million
$10.1 million
$12 million
$15.4 million

47.

Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio.

What are the forecasted retained earnings for Year 2011?

YOUR ANSWER	CORRECT ANSWER
$5,000
$30,000
$2,020,000
$2,025,000

48.

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

YOUR ANSWER	CORRECT ANSWER
Projected total assets − projected total liabilities + projected owner’s equity
Projected total assets + projected total liabilities − projected owner’s equity
Projected total assets + projected total liabilities + projected owner’s equity
Projected total assets − projected total liabilities − projected owner's equity

49.

A preview is unavailable for this question.

YOUR ANSWER	CORRECT ANSWER
A preview is unavailable for this answer.

50.

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

Choose 3 answers

YOUR ANSWER	CORRECT ANSWER
Annual cash flows for the life of the new project
Cash flow when the firm terminates the project
The estimated value of the firm’s stock price
The initial cost of the new project
The estimated value of the firm’s capital assets

51.

What are two examples of sunk costs?

Choose 2 answers

YOUR ANSWER	CORRECT ANSWER
The cost of a market study conducted prior to the decision
The cost of feasibility consulting incurred before the decision point
The cost of scrapping an old machine to replace with a new machine
The cost of disposing an old asset

52.

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 the two companies?

YOUR ANSWER	CORRECT ANSWER
Company A has lower risk than Company B.
Company A must have a lower increase in sales than Company B to achieve the same operating income.
Company A has lower debt than Company B.
Company A has higher fixed costs than Company B.

53.

Which action is an important part of managing accounts receivable?

YOUR ANSWER	CORRECT ANSWER
Setting credit terms
Determining optimal inventory levels
Managing disbursement float
Evaluating opportunity costs

54.

What is the main benefit associated with holding inventory?

YOUR ANSWER	CORRECT ANSWER
It maximizes the value of the company.
It makes it possible to meet the demands of customers.
It provides the company with an income tax shield.
It reduces current liabilities.

55.

A person needs to determine the cost to 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?

YOUR ANSWER	CORRECT ANSWER
Book value
Present value
Market value
Historical value

56.

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

YOUR ANSWER	CORRECT ANSWER
Individual securities
Actively managed funds
Floating-rate securities
Index funds

57.

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?

YOUR ANSWER	CORRECT ANSWER
It will result in a greater percentage decrease in Company Y’s pre-tax profit.
It will result in a greater percentage decrease in Company Z’s pre-tax profit.
It will result in a greater percentage increase in Company Z’s pre-tax profit.
It will result in a greater percentage increase in Company Y’s pre-tax profit.

58.

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

YOUR ANSWER	CORRECT ANSWER
A firm facing bankruptcy will increase the relative amount of debt in order to increase payment to creditors rather than shareholders.
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.
A firm facing bankruptcy is not affected by any costs, and therefore does nothing to restructure capital.
A firm facing bankruptcy is exempt from repaying debt, and therefore restructures its capital structure towards debt.

59.

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

YOUR ANSWER	CORRECT ANSWER
Debt financing provides greater solvency risk.
Debt financing provides interest tax benefits.
Debt financing provides less shareholders’ control.
Debt financing provides optimal capital structure.

60.

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

YOUR ANSWER	CORRECT ANSWER
Common stock
Convertible bond
Preferred stock
Treasury bond

61.

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

YOUR ANSWER	CORRECT ANSWER
The cost of debt will decrease.
The cost of debt will increase.
The cost of equity will decrease.
The cost of equity will increase.

62.

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

YOUR ANSWER	CORRECT ANSWER
Accounts receivable turnover
Rate of return on sales
Times interest earned ratio
Earnings per share

63.

What is the reason for holding cash and cash equivalents?

YOUR ANSWER	CORRECT ANSWER
To provide liquidity
To ensure opportunity cost coverage
To ensure shortage cost coverage
To provide credibility

64.

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

YOUR ANSWER	CORRECT ANSWER
Operating balance
Reserve balance
Beginning balance
Working Capital

65.

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

YOUR ANSWER	CORRECT ANSWER
By requiring public disclosure of information about entities that sell public equity or debt
By providing advice to institutions and individuals who are considering making financial investments
By designing software, management systems, and other technologies to coordinate financial exchanges
By investigating the reasons behind poor investment decisions and organizational underperformance

66.

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

YOUR ANSWER	CORRECT ANSWER
Disclosure of off-balance sheet debts
Monthly evaluation of internal controls
Publication of detailed prospectus for investors
Announcement of annual public shareholder meetings

67.

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

YOUR ANSWER	CORRECT ANSWER
Prospectus
Annual report
10K
10Q

68.

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)?

YOUR ANSWER	CORRECT ANSWER
Sales practices
Purchase practices
Payroll practices
Production practices

69.

What did the Dodd-Frank Act seek to prevent?

YOUR ANSWER	CORRECT ANSWER
Banks making loans to borrowers with low incomes
Financial institutions becoming too big to fail
Conflicts of interest in audits by accounting firms
The loss of capital gains by large institutional investors