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? - Performance evaluation
A company calculated variances of a budget and actual cash...
D076 Q&A VERIFIED 100%
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? - ✔✔Performance evaluation
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? - ✔✔Performance evaluation
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.
- When the IRR of a project is greater than the hurdle rate (the required rate of return, or cost of
capital), it indicates that the company should accept the project.
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.
- When the IRR of a project is greater than the hurdle rate (the required rate of return, or cost of
capital), it indicates that the company should accept the project.
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
- you are comparing the company's ratio to the goal and checking how the company is progressing
toward the goal.
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
- you are comparing the company's ratio to the goal and checking how the company is progressing
toward the goal.
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) - The PI should be
used first to compare the projects and then to rank them to maximize the value of the firm.
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) - The PI should be
used first to compare the projects and then to rank them to maximize the value of the firm.
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? - ✔✔Financing
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? - ✔✔Financing
A company is trying to decide which of four projects to invest in.
Project 1 has an IRR of 14% and an NPV of $54,000.
Project 2 has an IRR of 11% and an NPV of $67,000.
Project 3 has an IRR of 9% and an NPV of $60,000.
Project 4 has an IRR of 13% and an NPV of $47,000.
If the company can do only 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 decide which of four projects to invest in.
Project 1 has an IRR of 14% and an NPV of $54,000.
Project 2 has an IRR of 11% and an NPV of $67,000.
Project 3 has an IRR of 9% and an NPV of $60,000.
Project 4 has an IRR of 13% and an NPV of $47,000.
If the company can do only 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 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. - By setting a strict covenant, there is a risk that the company may
not meet its obligation, which would deter the company from taking on risky projects.
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. - By setting a strict covenant, there is a risk that the company may
not meet its obligation, which would deter the company from taking on risky projects.
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 - Idiosyncratic risk is the same as firm-specific risk. Since the strike will most likely
affect only this firm, it is a firm-specific risk.
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 - Idiosyncratic risk is the same as firm-specific risk. Since the strike will most likely
affect only this firm, it is a firm-specific risk.
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.
- Both NPV and IRR take into account the time value of money.
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.
- Both NPV and IRR take into account the time value of money.
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. - ✔✔Making financing decisions
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. - ✔✔Making financing decisions
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. - Liquidity is a measure of
the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an
indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing.
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. - Liquidity is a measure of
the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an
indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing.
A firm is currently operating at 75% capacity with current sales of $34 million.
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