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D076 Question and Answer Rated A+
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0 / 1 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 - While everyone ha...

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  • February 3, 2024
  • 20
  • 2023/2024
  • Exam (elaborations)
  • Questions & answers

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D076 Question and Answer Rated A+


0/1

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 -
While everyone has different personal financial goals, the objectives of such goals is to
maximize individual utility.



0/1

You are analyzing fixed assets to create pro forma financial statements for your company. You
realize that, since sales will increase next year, you will also need your manufacturing capacity
to increase by the same amount. Currently, you are operating at maximum capacity. You buy an
entire new factory and multiple pieces of equipment that increase capacity to much more than
you need to meet the sales growth. Which concept describes why such a large purchase was
necessary? - ✔✔✔Fixed assets are lumpy. - You cannot purchase only part of a factory and
equipment to meet the sales growth. Instead, you must purchase the entire factory along with
all the equipment to meet the sales growth. We call the increase of fixed assets as the firm
approaches its full capacity "lumpy assets" because it requires a lump sum purchase.



1/1

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. - ✔✔✔
Financing a goal - He has already made a decision to purchase the car and is now deciding on
financing options.



1/1

The company Betsy's Wigs is considering three potential projects that are not mutually
exclusive. The IRR, NPV, and PI for each project are listed in the table below. Use this

,information to rank the projects in the order in which Betsy's Wigs should accept them to bring
the most value to the firm.




Project Project 1 Project 2 Project 3

IRR 23% 18% 21%

NPV $820 $880 $790

PI 1.02 1.27 1.35 - ✔✔✔Project 3, Project 2, Project 1 - The projects with the highest PIs
should be accepted first.



1/1

Which type of financial institution is a mutual fund? - ✔✔✔Investment institution -
Investment institutions provide individuals and firms access to financial markets.



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)



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 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'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 - Accounting manipulation by management in pursuit of higher stock-related
compensation is an example of an agency problem.



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

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