(TEST) Finance Skills for Managers - D076

What are the main services offered by financial institutions? - answer-Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions (Correct! Financial institutions such as banks, insurance companies, and mutual fund companies provide these services.) What is the main objective of personal financial goals? - answer-To maximize individual utility (Correct! You set goals and act to increase your satisfaction or happiness by taking care of necessities and achieving priorities.) Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? - answer-Making financing decisions (Correct! Once investment decisions are made, a financial manager considers different possibilities of financing sources for the investments. This may include issuing new stocks and bonds.) Why is understanding the definition of finance important in managing personal finances? - answer-It helps individuals compare the costs and benefits of an action to determine whether to take that action. (Correct! Any financial decision should make sense in terms of its costs and benefits.) In which type of market would a company issue bonds or stocks for the first time? - answer-Primary market (Correct! This is the purpose of a primary market.) Which type of financial institution is a mutual fund? - answer-Investment institution (Correct! Investment institutions provide individuals and firms access to financial markets.) Which financial institution specializes in managing and administering retirement funds? - answer-Pension funds (Correct! Pension funds specialize in retirement funds.) Which type of economic indicator is the consumer price index? - answer-Lagging indicator (Correct! CPI usually changes after the economy as a whole changes.) What does the term ethical refer to? - answer-The accepted standards of conduct that guide a person's behavior (Correct! Ethical refers to the accepted standards of conduct that guide a person's behavior.) 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? - answer-Agency problem due to conflicting interests (Correct! Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem.) UNIT 3 What is another name for the cost of capital? - answer-Discount rate (Correct. Cost of capital, discount rate, required rate, and interest rate are the same thing with different names based on different perspectives.) What is the name for the minimum rate of return that an investor or lender will accept for investments? - answer-Required rate of return (Correct. This is the rate that investors accept as compensation for risk, opportunity cost, and inflation.) The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest rate? - answer-5% (Correct. Real Rate = Nominal Rate - Inflation, so 8% - 3% = 5%.) Which action reduces the future value of cash flows? - answer-Receive all cash flows later than expected. (Correct. The later the cash flows are received, the lower the future value is.) How is risk defined in finance? - answer-The possibility that the realized or actual return will differ from what we expect (Correct. Risk is defined as the possibility that the realized or actual return will differ from our expected return.) Which example below is considered a market risk factor? - answer-An unexpected change in interest rate occurs. (Correct. This is a factor that affects everyone because it will cause the cost of borrowing and lending to increase. This is a market risk factor.) UNIT 4 Why are ratios useful for analyzing and comparing company performance between firms of different sizes? - answer-They provide standardization. (Correct! Ratios standardize financial data to make them comparable across firms, even those of distinctly different sizes.) You are the financial manager of a firm. The firm is small and is struggling to collect cash from accounts receivable. Also, due to the nature of industry, inventories are illiquid. To make sure that the firm has enough cash holdings for short-term obligations, you decide to create a new ratio of cash to short-term obligations. What is this scenario an example of? - answer-Flexibility (Correct! Ratio analysis is flexible, so you can create a new ratio given the need of the firm.) Why are activity ratios also called efficiency ratios or asset use efficiency ratios? - answer-Because they measure how well a company uses its assets to generate sales or cash. What type of ratio is used to consider how a firm is financed and to assess a firm's ability to pay interest and pay back long-term obligations? - answer-Financing ratios (Correct! Financing ratios consider how a firm is financed.) What does a net margin of 7% indicate? - answer-For every dollar of revenue, 7 cents remain for the equity holders after all other costs are covered. (Correct! Net margin tells us the percentage of sales that will become net income, which is the amount remaining for the equity holders.) Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? - answer-Tighten the credit standards for its customers. (Correct! The credit standards are too loose, so the customers are not paying Firm A as quickly as they are paying other competitors in the industry. Tightening the credit standards would shorten the average collection period.) What is the difference between the current ratio and the quick ratio? - answer-Inventory is excluded in the calculation of the quick ratio. (Correct! Since inventory is the least liquid current asset, inventory is not included in the calculation.) Which term is used to describe the stock of a firm with market-to-book ratio of less than 1? - answer-Value stock (Correct! An M/B ratio of less than 1 is considered a value stock.) What does inventory turnover assess? - answer-The inventory management of a firm (Correct! Inventory turnover tells us how well a firm is managing its inventory.) You are comparing the return on equity of Firm 1 and Firm 2. Both firms have an identical profit margin and asset turnover, but Firm 1 has an overall higher return on equity. What must be true? - answer-Firm 1 is using a higher proportion of debt to finance its operations. (Correct! The third component of return on equity is the leverage multiplier. Since the firms' profit margins and asset turnovers are the same, it must be the leverage multiplier that is different. Using a higher amount of debt would result in a larger leverage multiplier and an overall higher return on equity.) UNIT 5 Jerry wants to begin budgeting his money. What are three principles that he should know before beginning the budgeting process? - answer-Keep records; understand the key areas of savings, expenses, and income; and eliminate consumer debt. (Correct! These are three of the six principles of budgeting. The other three are know yourself; develop savings, income, and expense strategies; and use a method that meets your needs and objectives.) What are the three things one must determine before making a personal budget? - answer-Income, expenses, and savings (Correct! Knowing these things allows you to create a statement that accurately reflects your cash flows from month to month.) A firm had sales of $100,000 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? - answer-Because the firm did not make all sales on cash (Correct! Some sales are made on credit rather than cash, and a portion of credit sales are collected in the following months after the sales.) What three things should an individual or company be doing so that their budget is effective and so that they are on track to meet their financial goals? - answer-Track cash flows, monitor cash flows, and revise the budget (Correct! Doing these things helps you to use your money in the most efficient and effective way possible.) What is the envelope method of budgeting? - answer-Withdrawing cash at the beginning of the period and then allowing only a certain amount to be available for each category of spending (Correct! The envelope method involves putting a specific portion of your budget in cash in each envelope and only spending this amount during the period.) What are long-term financial forecasts used for? - answer-Making investment and financing decisions (Correct! Whatever growth a firm anticipates must eventually be financed one way or another. Any investment in capital that exceeds what the firm retains from profit generates a discretionary financing need.) Which type of account does not vary with sales and is left to management's discretion? - answer-Non-spontaneous accounts (Correct! Non-spontaneous, or discretionary, accounts do not vary automatically with sales but are left to the discretion of management.) Which account is a discretionary account? - answer-Notes payable (Correct! Notes payable does not vary with sales, and it is based on management discretion.) What is the rate at which a firm can grow without issuing new equity? - answer-Sustainable growth rate (Correct! The sustainable growth rate is the growth rate that allows a firm to maintain its present financial ratios without issuing new equity.) Why do fixed assets increase as a lump sum instead of in proportion to sales growth? - answer-A firm must purchase an entire fixed asset rather than just the portion needed to increase production. (Correct!. A factory or a piece of equipment must be purchased as a whole.) UNIT 6 What would an analyst predict for a potential investment with an NPV of zero? - answer-The project would earn exactly the rate of return required by the firm. (Correct! An NPV of zero indicates that a project will neither add nor take away value from a firm.) 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? - answer-Yes, the analyst could use both the NPV and the IRR. (Correct! Both NPV and IRR take into account the time value of money.) If two projects are mutually exclusive, which decision-making criterion will help you make the best decision about which project to accept? - answer-Net present value (NPV) (Correct! When only one project can be chosen, the PI is not useful because it does not indicate the dollar value that a project will add to or take away from a firm.) Why might a firm prefer to raise debt capital through bonds instead of stocks? - answer-Bonds do not require a firm to give up any ownership. (Correct! This is attractive to a firm that needs funds for a project but wishes to maintain control.) Why is it appropriate to calculate the value of a bond in the same way that the present value of an annuity is calculated? - answer-Bonds pay a coupon every six months, pay a constant coupon amount, and have a maturity date. (Correct! Bond cash flows are an annuity, a constant amount paid every period.) Why i