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D076 Quizzes
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*Part 1* 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 casts 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 additio...

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  • February 3, 2024
  • 32
  • 2023/2024
  • Exam (elaborations)
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D076 Quizzes
*Part 1* 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 casts 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



*Part 2* 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 casts 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 monitor its actual cash flows and then revise the cash budget if needed



*Part 3* 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 casts 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 increase the lender's trust in a firm by demonstrating the firm's
ability to make profits and repay loans



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? - ✔✔Yes, because the IRR exceeds the cost of capital.

,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



A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them In order to prioritize projects that fit within the company's budget,
which capital budgeting method should be used? - ✔✔Profitability Index (PI)



A company is trying to decide which of four projects to invest in.

Project 1 has IRR of 14% & NPV of $54,000

Project 2 has IRR of 11% & NPV of $67,000

Project 3 has IRR of 9% & NPV of $60,000

Project 4 has IRR of 13% & NPV of $47,000

If the company can only do one project, which project should it choose to add the greatest value to the
firm? - ✔✔Project 2. The project with the highest NPV will bring the most value to the company



A company is trying to finance a project with a mortgage loan from a bank. The company's assessment
of the project indicated that the company may experience several years of loss until the project
becomes profitable. This means that the company might lost 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.



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

,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? - ✔✔Agency problem due to conflicting interests



A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment
using a method that considers the time value of money. Is there more than one way to do this? - ✔✔
Yes, the analyst could use both the NPV and the IRR



A firm had sales of $100,00 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



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



A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this? - ✔✔Investment bank



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



A potential project to expand the size of an apartment complex will cost $100,000. Its calculate net
present value is $5,000. Given this info, which statement is correct? - ✔✔The project should be
accepted because it has a positive NPV



About a year ago, short-term Treasury bill had 1.54% interest & long-term Treasury note had 2.54%
interest. This week, 1-year Treasury bill has interest rate of 3.13%, while 10-year Treasury note has an
interest rate of 2.28%. What does this info indicate about the future economy? - ✔✔It may indicate an
economic downturn

, Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - ✔✔It should choose the
projects with the highest PIs until all capital has been used



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



Beckingham Sports is an American sporting goods company. Based on a $400k market study and a $600k
fee for consulting spent prior to the project, the firm can increase its annual operating cash flow by
$3mil by selling overseas. Because the firm was considering the expansion, it spent $2mil to purchase a
land for new factory & equipment. However, someone is making an offer to pay the company $3mil for
the land it purchased for the new factory. What is relevant to include in the company's capital budgeting
decision? - ✔✔$3mil for the offer price of the land



BigDog and SmallDog are two companies that have an identical return on equity. One difference
between the 2 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



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



Considering 4 projects. Initial cost to start each project is $500k and total cash inflows generated by
each project are $600k. Each project also has same level of risk. Only difference between 4 projects is
cash flow patterns.

Project A Year 1-$200k, Year 2-$200k, Year 3-$200k

Project B Year 1-$300k, Year 2-$200k, Year 3-$100k

Project C Year 1-$100k, Year 2-$200k, Year 3-$300k

Project D Year 1-$600k, Year 2-$300k, Year 3-$-300k

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