D076 – Finance REVIEW EXAM PASSED

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 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 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 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 potential project to expand the size of an apartment complex will cost $100,000. Its calculated net present value is $5,000. Given this information, which statement is correct? - The project should be rejected because it has a negative NPV. Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a $600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent $2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in the company's capital budgeting decision? - 3,000,000 for the offer price of the land 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. Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of BigDog. Since both companies have the same ROE, SmallDog must have a higher ROA. 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 How can agency problems can be reduced through corporate control? - Setting strict goals 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. How do corporations and purchasers of financial securities view returns? - Purchasers of financial securities look at returns as the amount of money they require in order to lend or give their money to the corporation that issued those securities. How does management choose between two projects that are seemingly the same? - Management can analyze the different inherent risks that change the cost of capital to the firm. If two projects are mutually exclusive, which decision-making criterion will help you make the best decision about which project to accept? - Net present value (NPV) In which type of market would a company issue bonds or stocks for the first time? - Primary market Knowing that you are taking this finance class, a friend asks you about two investment opportunities he is considering. He wants to know which of the firms is using its assets more efficiently to generate sales. Which set of information could help you determine this? - Firm A has an asset turnover of 4, and Firm B has an asset turnover of 2.5.