D076 Test Questions and Answers with Verified Solutions

In which way is accounting different from finance? Accounting is backward looking, while finance is focused on the future. Accounting is focused on allocating capital, while finance is focused on bringing in capital. ...

In which way is accounting different from finance? Accounting is backward looking, while finance is focused on the future. Accounting is focused on allocating capital, while finance is focused on bringing in capital. Accounting is about budgeting, saving, and borrowing, while finance is about investing, forecasting, and lending. ✔✔Accounting is backward looking, while finance is focused on the future. What is the main question that both individuals and companies must consider when making financial decisions to reach a goal? Will the benefits of the action outweigh the costs? Will this decision require debt or equity financing? Will utility be maximized through this decision? ✔✔Will the benefits of the action outweigh the costs? A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of?Making financing decisions Making investment decisions Managing interdepartmental loans ✔✔Making financing decisions How can investing help a person reach personal financial goals? It provides access to potential revenue or increases in value to help meet goals faster. It ensures money is placed in a safe, risk-free, and easily accessible financial asset. It helps a person understand how money was spent previously in order to reliably predict future expenses. ✔✔It provides access to potential revenue or increases in value to help meet goals faster. A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? Efficient market Secondary market Money market Primary market ✔✔Primary marketWhich type of economic indicator changes after the economy changes and helps identify trends in the long term? Yield curve indicator Leading indicator Coincident indicator Lagging indicator ✔✔Lagging indicator How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy? By insuring deposits in investment accounts up to $250,000 to promote public confidence By raising capital on a contractual basis, such as an insurance contract By providing individuals and firms access to financial markets to buy or sell financial securities ✔✔By providing individuals and firms access to financial markets to buy or sell financial securities Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn? Correlated indicator Coincident indicatorLagging indicator Leading indicator ✔✔Leading indicator What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects? Set strict covenants that the company cannot uphold if it chooses a risky project Encourage manipulation of accounting procedures to optimize the company's profit Separate owners from management so their interests do not conflict ✔✔Set strict covenants that the company cannot uphold if it chooses a risky project Which factor contributes to the inflation of the prices of goods and services over time? Increase in demand for goods and services Decrease in costs of production Decrease in employee demand for higher wages ✔✔Increase in demand for goods and services Why can compounding interest be a good tool but also a significant detriment? Compounding interest can be a good tool to understand the time value of money, but it is a detriment because it does not take inflation into account.Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest. Compounding interest can be a good tool because it summarizes the required return, but it is a detriment because it requires a larger cost of capital. ✔✔Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest. How is inflation calculated? Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy. Inflation is calculated by determining the rate at which the demand for particular goods and services has increased over a period of time in an economy. Inflation is determined by the federal government at a target rate of 2% a year. ✔✔Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy. Based on the following information about the stocks of several companies, which stock displays the greatest amount of risk? Stock A: Return = 22.22%, Standard Deviation = 9.99% Stock B: Return = 15.05%, Standard Deviation = 7.35%Stock C: Return = 38.83%, Standard Deviation = 4.54% Stock D: Return = 5.69%, Standard Deviation = 5.32% Stock A Stock B Stock C Stock D ✔✔Stock A. The higher the Standard Deviation the higher the risk. Which type of ratio should be used to examine the cost efficiency of a firm's production? Liquidity Market Efficiency Profitability ✔✔Profitability What is the process of analyzing financial data with ratios to compare a firm's performance to competitors? Evaluating Auditing ValuingBenchmarking ✔✔Benchmarking Which action will increase the return on equity of a firm? Increasing the liquidity of the firm Increasing the asset usage efficiency of the firm Decreasing the debt financing of the firm Decreasing the profitability of the firm ✔✔Increasing the asset usage efficiency of the firm Which principle of ratio analysis means that ratios are open for analyst interpretation, are not governed by rules, and allow creativity to work according to a particular company or asset? Focus Flexibility Standardization Evaluation ✔✔Flexibility As an active investor, Maria is analyzing her portfolio to decide if there are any stocks she should remove from her pool of financial securities. A company she has invested in, Quiet Flag Industries, just released its annual report. Which kind of method should Maria use to see if the company has improved?Progress measurement Trend analysis Cross-sectional analysis Focus analysis ✔✔Trend analysis Which type of ratios are banks and lenders most concerned about? Profitability Activity Liquidity Efficiency ✔✔Liquidity Which ratio helps an analyst evaluate whether a company can cover its short-term obligations? Current ratio Net margin Return on equity Market-to-book ratio ✔✔Current ratio What does the DuPont framework indicate about return on assets?Return on assets is based on the amount of the firm's debt and equity. All returns are based on the firm's profitability and efficiency. A firm can still have a high return on assets with low net income. ✔✔All returns are based on the firm's profitability and efficiency. An investment analyst is concerned about a construction company's ability to sell its inventory to meet current obligations, because much of the inventory (commercial buildings) it builds and sells takes longer than a year to construct. Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's ability to meet current obligations? Quick ratio Inventory ratio Leverage ratio Current ratio ✔✔Quick ratio An employee was recently hired as a financial analyst and asked to create a cash budget for the employee's division for the next year. Which component should the employee exclude from the budget? Payment toward the line of credit that is due next monthPurchase of equipment that will be bought in three years Purchase of inventory for sales that the employee will make this year ✔✔Purchase of equipment that will be bought in three years What are the benefits of using the traditional envelope method to track cash flows? It enables users to connect bank and credit card accounts to automatically update income and expenses. It requires users to carefully track specific expenses and write down their income and spending for the month. It is simple and helps ensure that users do not spend more than the cash that they have available. ✔✔It is simple and helps ensure that users do not spend more than the cash that they have available. A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? Standardization Assessment of future needs Corrective actionPerformance evaluation ✔✔Performance evaluation Which process is Li engaging in if he recently made a personal budget and is now keeping a record of his cash flows? Forecasting Tracking Monitoring Revising ✔✔Tracking Which type of expense is a magazine subscription? Fixed expense Monitored expense Asset expense Variable expense ✔✔Variable expense Which tool is forward-looking and thus helps decision makers understand how actions taken today can affect their firm's future performance? Ratio analysisFinancial statements Financial forecasting ✔✔Financial forecasting A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company's assets are increasing significantly, what else must increase? Profit turnover Accounts receivable turnover Financing Gross margin ✔✔Financing Jack works for a company that manufactures televisions and must obtain financing to increase the company's inventory levels. Jack's manager knows that current investment markets are tight, and it may be difficult for the company to obtain additional financing for the next year. The manager asks Jack to propose a way for the firm to reduce its discretionary financing needed (DFN). What should Jack suggest to reduce next year's DFN? Increase sales growth, resulting in a larger amount of revenue coming into the firm Lower the amount of dividends that are paid out to shareholders next yearIncrease the amount spent on fixed assets to increase production capacity ✔✔Lower the amount of dividends that are paid out to shareholders next year What is the term for the rate that allows a firm to maintain its present financial ratios without issuing new equity or increasing debt? Steady state growth rate Sustainable growth rate Capital growth rate Sales growth rate ✔✔Sustainable growth rate Which method is most commonly used for determining a company's DFN? You Selected Sustainable growth rate Percent of sales Historical regression Company multiples ✔✔Percent of sales Freedom Rock Bicycles has a sales capacity of $10 million. When sales exceed this capacity, the company must invest $200,000 in new equipment. Freedom Rock Bicycles had sales of $9million in one year, and it projects a sales growth of 10%. The net fixed assets in the year were $500,000. By how much will the company's discretionary financing need increase? $0 $50,000 $200,000 $900,000 ✔✔$0 Why are financial models helpful in financial forecasting? Models allow users to see the complex relationships between sales and other aspects of the business. Models provide credibility to a firm's financial statements for government agencies to review. Models show the future supply schedule for a firm, which allows for negotiation with suppliers. ✔✔Models allow users to see the complex relationships between sales and other aspects of the business. A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year?No, because the increase in sales will exceed the firm's sales capacity. Yes, because the increase in sales will exceed the firm's sales capacity. Correct No, because the increase in sales will not exceed the firm's sales capacity. ✔✔No, because the increase in sales will not exceed the firm's sales capacity. How does an analyst use the hurdle rate? It is used to calculate the IRR for a project and determine its value. It is used to determine the time frame of a project. It is used to compare with the IRR to determine whether a project should be accepted. ✔✔It is used to compare with the IRR to determine whether a project should be accepted. Which term refers to the metrics and calculations that use tools such as net present value (NPV), internal rate of return (IRR), and profitability index (PI) to evaluate investments? Capital budgeting criteria Projected financing criteria Security analysis criteria ✔✔Capital budgeting criteria What would profitability index (PI) be useful for?Computing the future value of a project in the future rather than the present value Determining whether a firm should invest in projects with different initial outlays Calculating returns for a project that does not have a definite return rate for IRR or NPV ✔✔Determining whether a firm should invest in projects with different initial outlays Maria is planning to invest in some company stocks for retirement and is trying to figure out if the stocks are a good buy. She calculates the intrinsic value of one of the stocks, Quiet Flag Industries, to be $35. The stock is currently trading on the market for $30, so she decides to buy it. Why was it a good idea for Maria to buy this stock? The stock is overvalued. The stock's intrinsic value is greater than 1. The stock is undervalued. ✔✔The stock is undervalued. How do bond payments to investors differ from stock payments to investors? Stock payments have a shorter duration than bond payments. Bond payments are larger than stock payments. Bond payments are fixed, and stock payments are variable. ✔✔Bond payments are fixed, and stock payments are variable