Finance Skills for Managers - D076 Questions and Answers Rated A

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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 What is the primary diff... erence between finance and accounting? ✔✔Finance focuses on the future, while accounting is generally backward-looking. Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? ✔✔Investments What is the primary goal of the financial manager of a firm? ✔✔To maximize owner wealth What should be the main question a firm asks when considering any investment decision? ✔✔Do the benefits of this investment outweigh the costs? What is the primary aim of personal finance goals? ✔✔To maximize satisfaction from products purchased and services obtainedWhich task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? ✔✔Making financing decisions Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? ✔✔Private equity Which task does a financial manager perform when assessing the costs and benefits of potential projects? ✔✔Making investment decisions What tool can you use to understand your overall personal cash flows? ✔✔Budgeting What is a reasonable alternative to keeping an emergency stash of cash? ✔✔Investing in a savings account 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? ✔✔FinancingWhat area of finance involves deciding which assets to invest in to create wealth in the future? ✔✔Investments 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? ✔✔Making a financing decision 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 maximize individual utility Which professional works with individuals to help them achieve their financial goals? ✔✔Financial planner 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? ✔✔Financing a goalWhat are the purposes of financial markets? ✔✔To provide liquidity and determine prices In which financial market are securities such as stocks and bonds are traded after their initial issuance? ✔✔Secondary market What kind of market primarily allows institutions to borrow and lend in the short term? ✔✔Money 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? ✔✔Primary market What is the primary role of financial institutions? ✔✔To conduct financial transactions such as investments, loans, and deposits What is a depository institution? ✔✔An institution that accepts and pays interest on deposits of money, as well as extends loansWhich financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy? ✔✔Central bank How do insurance companies pay policyholders when a claim is made? ✔✔They use returns from stocks and bonds. Which type of financial institution deals mainly with providing for retirement through employers? ✔✔Pension fund A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? ✔✔Investment bank Unemployment rate is which type of economic indicator? ✔✔Lagging 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 regulate inflation and unemployment What would an inverted yield curve signal? ✔✔It may indicate an economic downturn.In what way are coincident indicators useful? ✔✔They are analyzed during economic shifts to provide information about the current state of the economy. Which responsibility is a focus of the U.S. Securities and Exchange Commission? ✔✔To protect investors Which type of financial institution provides individuals and firms access to financial markets? ✔✔Investment institutions 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? ✔✔Private equity Yield curve is which type of economic indicator? ✔✔Leading 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%, whilethe 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy? ✔✔It may indicate an economic downturn. Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? ✔✔Moral What characterizes an ethical action? ✔✔An ethical action is based on accepted standards of conduct. 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 Which type of error would result in a set repercussion or penalty given by the government? ✔✔LegalNora 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. What are the effects of attempting to maximize shareholder value for a business in an unethical way? ✔✔It often leads to decreased shareholder value for the business. 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 Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? ✔✔Bondholders are primarily interested in making sure they will be paid back. Which kind of projects are bondholders interested in? ✔✔Safe projects with a higher chance of providing sufficient compensationWhich scenario is an example of an agency problem? ✔✔A manager purchases a company car and allocates it as a company expense. How can agency costs be mitigated? ✔✔Aligning managers' interests with shareholders' interests What is the third step in finding a solution to an ethical dilemma? ✔✔Consider all stakeholders involved What does the term legal describe? ✔✔An action that is in accordance with the laws and rules set by an authority. 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? ✔✔Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years.Why might a manager manipulate accounting procedures? ✔✔To make the company's performance look good Which situation is an example of an agency problem? ✔✔Managers follow their own interests instead of the owners' interest. 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? ✔✔Set a strict covenant that the company cannot easily achieve. What are the main services offered by financial institutions? ✔✔Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions What is the main objective of personal financial goals? ✔✔To maximize individual utility Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? ✔✔Making financing decisionsWhy is understanding the definition of finance important in managing personal finances? ✔✔It helps individuals compare the costs and benefits of an action to determine whether to take that action. In which type of market would a company issue bonds or stocks for the first time? ✔✔Primary market Which type of financial institution is a mutual fund? ✔✔Investment institution Which financial institution specializes in managing and administering retirement funds? ✔✔Pension funds Which type of economic indicator is the consumer price index? ✔✔Lagging indicator What does the term ethical refer to? ✔✔The accepted standards of conduct that guide a person's behaviorA 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? ✔✔Agency problem due to conflicting interests What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? ✔✔Interest rate How is the interest rate expressed? ✔✔As a percentage What is the main purpose of charging interest? ✔✔It allows borrowers to pay to use the assets of another entity to accomplish their own goals. What is a component of the required rate of return? ✔✔Opportunity cost Why would a long-term investment require a higher rate of return? ✔✔There is greater risk involved and a higher opportunity cost.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? ✔✔Buying a brand new car worth $25,000 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 Why is built-in inflation linked to adaptive expectations? ✔✔Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. Why does an increased demand for goods and services cause inflation? ✔✔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. What happens to prices in a market in which there is inflation? ✔✔Prices rise. What is the compensation for risk given to investors called? ✔✔Risk premiumWhich type of interest rate is the rate at which invested money grows for a certain period time? ✔✔Nominal rate Which component of an interest rate is an indicator of inflation and opportunity cost? ✔✔Riskfree rate What is the name for the interest rate expressed on an annual basis? ✔✔Annual percentage rate Why is the required rate of return also known as the hurdle rate? ✔✔It is the minimum rate that a firm must surpass to accept a project. What is the inflation rate? ✔✔The rate at which the average price level of a basket of goods and services in an economy increases What does the risk-free rate indicate? ✔✔Inflation and opportunity cost 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 tobe 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 inflation rate, she should expect this stock to provide a return higher than this for the associated risk. What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? ✔✔Ordinary annuity What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? ✔✔Future Value What is the name for the concept that a dollar today is worth more than a dollar in the future? ✔✔Time value of money 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.Why does the time value of money play an important role in financial decision-making? ✔✔Because the benefits of investments received at different times are comparable only when you consider the time value of money. 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? ✔✔1 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: ✔✔=FV(C2,C3,C4,C5,C6) 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? ✔✔PV function 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 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%. ✔✔=IRR(B3:E3)Which statement correctly contextualizes what a return is? ✔✔A return is the gain or loss on an investment over some period of time. What is an expected return? ✔✔A hypothesized estimate of future returns under different scenarios based on expectational data 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 The word risk is used in many different contexts. How is risk defined in finance? ✔✔The possibility that the realized or actual return will differ from the expected return. What makes market risk different from firm-specific risk? ✔✔Market risk cannot be diversified away, and firm-specific risk can.Which phrase accurately depicts what interest rate risk is? ✔✔Firm-specific risk is the risk associated with problems that companies may face because of lawsuits, labor problems, or management decisions, among other factors. Which phrase accurately depicts what interest rate risk is? ✔✔An example of market risk where the value of a bond is affected by changes in interest rates Which type of risk can be reduced by adding a variety of different assets into a portfolio? ✔✔Firm-specific risk How is risk separation different from diversification? ✔✔Risk separation involves dispersing assets geographically instead of concentrating them in one location. Which situation is a real-life example of risk transfer? ✔✔Buying home insurance—risk is transferred from the policyholder to the insurer Why would a company or individual want to retain risk? ✔✔Both companies and individuals retain risk when they believe that the cost of pursuing an activity is less than the alternative.Which statement correctly identifies the relationship between systematic risk and different types of firms? ✔✔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. How does the amount of time affect the risk associated with different investment vehicles? ✔✔Stock investments are more risky over a shorter period of time than over a longer period of time. What tends to happen to the risk of an investment that offers a higher return? ✔✔The risk is higher for an investment with a higher return. What makes the expected return subjective and different from other types of returns? ✔✔The expected return is based on expectational data and the probability of different scenarios occurring. 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? ✔✔Idiosyncratic riskWhich 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 What is the name for the process of "spreading" money over many different assets? ✔✔Diversification What is default risk? ✔✔A firm-specific risk that comes from the probability of a loss resulting from a borrower's failure to repay a contractual obligation Which statement below is an example of how ratios are used in the field of finance? ✔✔A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Why are ratios considered flexible? ✔✔Because they are not regulated and can be changed or invented according to a firm's needs How might calculating financial ratios help shareholders? ✔✔Ratios can be used to determine whether a firm is maximizing shareholder wealth.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 What type of ratio is used to assess a firm's ability to meet short-term obligations without raising external capital? ✔✔Liquidity ratios Why are several different types of ratios used to analyze a firm? ✔✔Because different types of ratios are needed to get information about different parts of a firm What do leverage ratios describe? ✔✔What proportions of equity and debt a firm uses to finance its assets 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 liquidity ratio is increasing. Which type of ratio is a current ratio? ✔✔LiquidityWhat is the main difference between the current ratio and the quick ratio? ✔✔The current ratio includes inventory in current assets, and the quick ratio does not. 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 expected to grow in the future. What does the net margin measure? ✔✔The percent of revenue that is retained as profit for the firm Which of these measures is a component of return on equity? ✔✔Net margin How can the DuPont framework help a company assess its 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. Which action increases the return on equity of a firm if all else remains constant? ✔✔Increasing debt financing What is a component of the DuPont framework? ✔✔Return on assetsWhat is one way that a firm can improve its return on equity? ✔✔Successfully cutting production costs to boost net margin 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 higher ROA than BigDog. Which actions, taken together, will certainly increase a firm's ROE? ✔✔Decreasing equity financing and increasing net margin 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? ✔✔Progress measurement For what purpose are market ratios used? ✔✔To evaluate the current share price of a publi [Show More]

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