PRE-ASSESSMENT: PRINCIPLES OF FINANCE PPBO Attempt #1 Status: Passed 1. The credit manager for a company is responsible for setting the company’s credit
... [Show More] policy regarding availability and limits for customers. What is one of the additional responsibilities of this credit manager? YOUR ANSWER CORRECT ANSWER Investing excess cash Collecting past-due accounts Monitoring accounts payable Purchasing insurance 2. Which activity is financial management responsible for? YOUR ANSWER CORRECT ANSWER Ensuring sufficient financing is available Verifying the balance sheet is properly constructed Reporting past earnings for shares of stock Researching different products to bring to market 3. What is one of the main areas of the financial environment?YOUR ANSWER CORRECT ANSWER Investments Human resources Marketing Foreign relations 4. What is a common challenge in the world of finance? YOUR ANSWER CORRECT ANSWER It generally operates with a high degree of uncertainty. It causes investor anxiety due to a volatile stock market. It is difficult to abide by generally accepted accounting principles (GAAP). It has to comply with banking regulations that are subject to change. 5. Which variable must be considered when a corporation's finance department is determining the best strategy for financing a project? YOUR ANSWER CORRECT ANSWER The amount of debt and equity financing currently in use The bid-ask spread for the company’s stock Recent changes to the federal funds rate The amount of trade credit from suppliers for the project6. An individual is interested in establishing a lawn care business as a sole proprietorship. What will be a disadvantage of choosing this business model? YOUR ANSWER CORRECT ANSWER Unlimited liability Frozen investments Government regulations Management disagreements 7. What is one benefit of a sole proprietorship? YOUR ANSWER CORRECT ANSWER The owner has uninterrupted control of the business. The personal assets of stockholders are protected. The company can continue to exist with the death of the owner. The business is taxed separately from the owner’s personal taxes. 8. What is a disadvantage of a general partnership? YOUR ANSWER CORRECT ANSWER Owners' personal assets are not protected against claims of creditors. Losses from the business are deductible on an individual’s tax return.YOUR ANSWER CORRECT ANSWER Complex business filing paperwork is required. Annual reports must be filed to shareholders. 9. What is one advantage of an LLC? YOUR ANSWER CORRECT ANSWER Flexibility in obtaining funding from venture capitalists Limited personal liability Membership interest not easily transferable Number of members fixed at 100 10. What is an example of a potential principal-agent problem? YOUR ANSWER CORRECT ANSWER Corporate executives buying other companies to expand their influence Disagreement among managers on the direction of their firm Missing revenue estimates during a recession Changing the company’s dividend policy to bolster stock values 11. An individual decides to sell corporate bonds to another investor. Which type of financial market or institution would be involved in this transaction?YOUR ANSWER CORRECT ANSWER Retail securities firm Insurance company Mortgage lender United States Treasury 12. A firm wants to sell new shares of stock. Which other institution is involved in this type of transaction? YOUR ANSWER CORRECT ANSWER Investment banking firm Insurance company Hedge fund Savings and loan 13. A partnership needs funds to purchase technology equipment. It will be able to repay those funds in under a year’s time. Which organization should the partnership contact to obtain the needed funds? YOUR ANSWER CORRECT ANSWER Retail bank Insurance company Check-cashing institutionYOUR ANSWER CORRECT ANSWER Hedge fund 14. Which type of transactions do financial institutions deal with? YOUR ANSWER CORRECT ANSWER Deposits Vehicle registrations Tax returns and deductions Hiring bonuses 15. What is considered a financial institution? YOUR ANSWER CORRECT ANSWER Commercial bank Accounting firm Auction Lottery system 16. Which situation is unethical? YOUR ANSWER CORRECT ANSWER The investment manager publishes false investment performance reports in hopes of convincing new investors to invest money.YOUR ANSWER CORRECT ANSWER The hiring manager of a company suggests that his uncle should buy the company stock after company financial information is made public. A high-ranking director sells shares of his own company stock to fund a family medical expense. A corporate executive asks her aunt to review her most recent tax return. 17. Which type of financial statement is used to determine the short-term viability of a company? YOUR ANSWER CORRECT ANSWER Income statement Balance sheet Statement of cash flows Statement of changes in equity 18. Which are components of an income statement? YOUR ANSWER CORRECT ANSWER Revenue and expenses Current and noncurrent assets Retained earnings and dividends Short-term and accrued liabilities 19. Which statement describes the historical cost principle?YOUR ANSWER CORRECT ANSWER Most assets are valued at their original cost when acquired by a company. The accounts receivable balance is modified after determining collectability. Most assets are valued at their fair market value when acquired by a company. An asset's value changes annually depending on the generally accepted market cost. 20. When do business owners and managers use financial statements? Module 4, pg. 50 YOUR ANSWER CORRECT ANSWER When deciding to make or purchase certain materials When setting the current market price of company common stock When deciding to use retained earnings as a cash account When deciding whether to sell uncollectable short-term liabilities 21. Which financial method allows external users to determine the net worth of a business? Module 4, pg. 50 YOUR ANSWER CORRECT ANSWER Measuring cost of capital Comparing cash flows Calculating financial ratios Analyzing financial statements22. Which financial method will be useful in summarizing an individual firm's operating, investing, and financing activities? Module 4, pg. 50 YOUR ANSWER CORRECT ANSWER Comparing financial data Measuring cost of capital Calculating financial ratios Analyzing financial statements 23. Which item from a company’s financial statement is considered a non-cash item? YOUR ANSWER CORRECT ANSWER Interest Intangibles Utilities Taxes 24. Which documents would have the necessary information needed to calculate profitability ratios? YOUR ANSWER CORRECT ANSWER Financial statements Bank statements Stock analyst reportsYOUR ANSWER CORRECT ANSWER Dividend history reports 25. A company has sales of $132 million, net income of $24 million, a total asset turnover of 0.84, and a leverage multiplier of 1.6. What is this company's return on equity, using the DuPont formula? Round to two decimal places. Module 5, pg. 67 $24 mil / $132 mil = .1818 .1818 x 0.84 x 1.6= 02.444 YOUR ANSWER CORRECT ANSWER 15.41% 16.79% 18.18% 24.43% 26. A company has sales of $56 million, net income of $19 million, a total asset turnover of 0.98, and a leverage multiplier of 1.2. What is this company's return on equity, using the DuPont formula? Round to two decimal places. Module 5, pg. 67 19/56= .3393 .33.93 x 0.98 x 1.2 = .3990 YOUR ANSWER CORRECT ANSWER 19.80%19/56= .3393 .33.93 x 0.98 x 1.2 = .3990 YOUR ANSWER CORRECT ANSWER 32.50% 39.90% 41.20% 27. A company has a return on equity of 15%, a leverage multiplier of 1.5, and a total asset turnover of 0.93. What is this company's net margin, using the DuPont formula? Module 5, pg. 67 1.5 x 0.93 = 1.3950 15% / 1.3950 = 10.75 YOUR ANSWER CORRECT ANSWER 0.11% 9.35% 10.75% 13.44% 28. What does a spontaneous account refer to? Module 6, pg. 91 YOUR ANSWER CORRECT ANSWER An account on the balance sheet that changes when net income is changed An account on the income statement that cyclically appearsYOUR ANSWER CORRECT ANSWER An account on the balance sheet and income statement that is calculated using the time value of money An account on the balance sheet and income statement that tends to vary when sales are changed 29. A firm has a net income of $68.0 million and pays out $9.1 million in dividends. The firm has total assets of $987 million and total liabilities of $559 million. What is the firm's sustainable growth rate, given this information? Round your answer to two decimal places. Module 6, pg. 91 YOUR ANSWER CORRECT ANSWER 17.51% 19.11% 13.76% 11.21% 30. Which type of data is collected by observing many subjects at the same point in time? YOUR ANSWER CORRECT ANSWER Time series Judgmental Cross-sectionalYOUR ANSWER CORRECT ANSWER Longitudinal 31. What does retained earnings on the balance sheet represent? Module 6, pg. 91 YOUR ANSWER CORRECT ANSWER The total of firm earnings that have been reinvested in the firm The cash reserve account to be used in emergency situations The cash reserve account to be used when liquidating the company The total of firm revenues that have been reinvested in the firm 32. Which account is a spontaneous account? YOUR ANSWER CORRECT ANSWER Inventory Notes payable Real property Property, plant, and equipment 33. A firm has projected assets to be $22 million, liabilities to be $11 million, and owner’s equity to be $3 million. Module 6, pg. 91 What is the discretionary financing need?YOUR ANSWER CORRECT ANSWER $11 million $33 million $18 million $8 million 34. How is discretionary financing calculated? Module 6, pg. 91 Net ass – some lies-retarded earrings YOUR ANSWER CORRECT ANSWER Net change in assets minus the sum of the net change in liabilities and retained earnings Sum of the net change in assets and liabilities minus the net change in retained earnings Net change in assets minus retained earnings minus the net change in liabilities Sum of the net change in assets, liabilities, and retained earnings 35. Which term describes the gain or loss on an investment over a period of time? YOUR ANSWER CORRECT ANSWER Rate of return Depreciation rate Discount rateYOUR ANSWER CORRECT ANSWER Rate of risk 36. A company invested $400,000 in real estate and later sold the real estate for $500,000. What was the rate of return on this investment? Module 7, pg. 103 (current value - initial value) divided by initial value x 100 500,000 - 400,000 = 100,000 100,000 / 400,000 = 0.25 0.25 x 100 =25 YOUR ANSWER CORRECT ANSWER 2.5% 20% 25% 125% 37. Which type of loan interest is calculated on both the principal of the loan and any accumulated interest called? YOUR ANSWER CORRECT ANSWER Compound interest Floating interest Simple interestYOUR ANSWER CORRECT ANSWER Variable interest 38. Which concept describes an investor preference for less risky short-term bonds over riskier long-term bonds? YOUR ANSWER CORRECT ANSWER Liquidity premium theory Expectation hypothesis Segmented market hypothesis Term structure of interest rates 39. Which term describes a graphic representation that uses a line to depict the relationship between the cost of borrowing (interest rates) and the term of a debt contract? YOUR ANSWER CORRECT ANSWER Yield curve Securities market line Expectation hypothesis Efficient frontier 40. In the 1920’s, a country experienced a monthly inflation of 30,000%. Which type of inflation occurred?YOUR ANSWER CORRECT ANSWER Hyperinflation Stagflation Negative inflation Demand-pull inflation 41. Which scenario represents an opportunity cost? Module 7, pg. 103 YOUR ANSWER CORRECT ANSWER Mary keeps money in her purse instead of partnering in her friend’s popular lemonade stand. John buys a new skateboard instead of a keeping his money in his wallet. John spends his entire $15 allowance on ice cream instead of spending it on jellybeans. Mary earns $30 from pet-sitting instead of earning $30 from babysitting. 42. What is time value of money (TVM)? YOUR ANSWER CORRECT ANSWER Money today is worth more than the same amount in the future. There is potential to increase the value of money over time. Interest can only be paid on the amount originally invested. Interest cannot be paid on interest previously earned.43. What is a characteristic of compound interest? YOUR ANSWER CORRECT ANSWER Interest is earned on the principal balance and on all interest earned in previous periods. Interest is only earned on the initial principal balance. Interest is only earned on the interest earned in previous periods and not on the initial principal balance. Interest accrues at a slow and steady pace. 44. What is a characteristic of simple interest? YOUR ANSWER CORRECT ANSWER Interest is only earned on the initial principal balance no matter how many periods have occurred. Interest is earned on the principal balance and on all interest earned in previous periods. Interest is only earned on the interest paid in previous periods and not on the initial principal balance. Interest accrues at an exponential rate of growth. 45. What is the difference between compounding and discounting of cash flows? YOUR ANSWER CORRECT ANSWER Compounding finds the present value of a future value and discounting finds the future value of a present value. Discounting finds the future value of the present value and compounding finds the present value of the future value. Compounding finds the future value of a present value and discounting finds the present value of a future value.YOUR ANSWER CORRECT ANSWER Discounting finds the future value of the future value and compounding finds the present value of a present value. 46. A person is planning to open a savings account with the intent to buy a house in five years. They will invest an equal amount each month for five years. This account will earn 6% per year (.5% per month) and will have $300,000 at the end of the five-year term. What is the amount of the monthly investment? Round your answer to the nearest dollar. Module 8, pg. 113 $0 PV 5 years x 12 = 60 mo 6%/12 months = .5 % 300,000 YOUR ANSWER CORRECT ANSWER $4,169 $4,300 $4,435 $5,296 47. A person is planning to open a savings account with the intent to buy a house in eight years. They will invest an equal amount each month for eight years. This account will earn 9% annually and will have $450,000 at the end of the eight-year term. What is the amount of the monthly investment? 0 PV 8 years x 12 months = 969% annually / 12 months = .75 450,000 YOUR ANSWER CORRECT ANSWER $4,687.50 $5,487.30 $3,217.59 $4,803.47 48. A manager is planning to receive a lump sum in the future and wants to determine the value of that lump sum in today's dollars. What must be done to the future cash flow to determine this value? Module 8, pg. 113 YOUR ANSWER CORRECT ANSWER Discount Compound Annuitize Mature 49. Which investment involves low risk and yields a low return? YOUR ANSWER CORRECT ANSWER Putting money in a bank savings accountYOUR ANSWER CORRECT ANSWER Buying stock in a start-up company Loaning money to a friend to start a business Investing in currency trading 50. What is the purpose of an expected return? YOUR ANSWER CORRECT ANSWER To assess the potential value of an investment To average the potential value of all investment opportunities To estimate how much revenue a new product will generate To reduce the variability of possible risks 51. How is variance related to expected return? YOUR ANSWER CORRECT ANSWER Investments with high expected return will have a higher variance. Investments with high expected return will have a lower variance. Investments with either a high or low expected return have the same variance. Investments with low expected return will have a higher variance. 52. How can risk be managed in a financial environment?YOUR ANSWER CORRECT ANSWER Diversify investment assets Diversify short-term liabilities Place all investments into one asset Place all assets into one investment 53. How would a company define risk in a financial environment? YOUR ANSWER CORRECT ANSWER The chance that an investment’s actual return will be different than expected The lack of correlation between risk and return An inverse relationship between risk and return The assurance that an investment’s actual return will always be exactly as expected 54. A young entrepreneur has a unique new business idea with the potential of achieving high profits starting in the second year of operation. This entrepreneur owns very few assets. Which capital financing strategy should the entrepreneur undertake to start up the business? Module 9, pg. 136 YOUR ANSWER CORRECT ANSWER Seek equity from investors with a high tolerance for risk Apply for a line of credit at a commercial bank Liquidate personal property to obtain working capitalYOUR ANSWER CORRECT ANSWER Obtain a long-term bank loan at a low interest rate 55. The time to maturity of bond A is 20 years, whereas the time to maturity of bond B is 5 years. What happens to the market prices of these bonds if market interest rates rise? YOUR ANSWER CORRECT ANSWER The price of bond A increases faster than the price of bond B increases. The price of bond A increases at the same rate that the price of bond B decreases. The price of bond A decreases faster than the price of bond B decreases. The price of bond A decreases at the same rate that the price of bond B increases. 56. Which kind of bonds are issued by cities, counties, or states? YOUR ANSWER CORRECT ANSWER Municipal bonds U.S. Treasury bonds Corporate bonds Sinking fund bonds 57. Which term describes a bond that is unsecured by any type of collateral?YOUR ANSWER CORRECT ANSWER Debenture Preferred Callable Zero-coupon 58. Which category of risk describes the likelihood that a bond’s current value will decrease commensurate with a general rise in market interest rates? YOUR ANSWER CORRECT ANSWER Price risk Reinvestment risk Default risk Tax risk 59. What describes the rights of creditors holding secured debt? YOUR ANSWER CORRECT ANSWER They have recourse to any and all company assets should the loan default. They have recourse to specific assets of the company should the loan default. They have no recourse to any assets of the company should the company liquidate. They only have claim on company assets after common stockholders receive their share should the company liquidate.60. Why are bonds a better financing option than issuing stock or incurring a bank loan? Module 11, pg. 174 YOUR ANSWER CORRECT ANSWER Bonds have less restrictive loan terms than bank loans. The principal balance of a bond never has to be paid back. The company’s debt-to-equity ratio is positively affected by bonds. Bonds always represent short-term borrowing. 61. The average debt-to-equity ratio for commercial banks is approximately 2.5. A commercial bank has a debt-to-equity ratio of 2.2. What does this indicate? Module 11, pg. 174 YOUR ANSWER CORRECT ANSWER The bank has a normal debt-to-equity ratio for its industry. The bank is on the verge of bankruptcy. The bank needs a timely infusion of equity financing. The bank is having a difficult time acquiring equity financing. 62. What is a key feature of common stock? Module 11, pg. 174 YOUR ANSWER CORRECT ANSWER Holders have company voting rights. The holders have first claim on dividends.YOUR ANSWER CORRECT ANSWER Dividend payments are fixed. It is convertible to preferred stock. 63. An investor is only interested in obtaining stable returns in a stock investment. Why would this investor purchase a preferred stock? Module 11, pg. 174 YOUR ANSWER CORRECT ANSWER It normally pays a fixed dividend on a recurring basis. It only pays dividends if the firm offers them. It provides corporate voting rights. It has a senior claim to debtors in the case of company bankruptcy. 64. What is an advantage of the payback period method? Module 12, Pg. 187 YOUR ANSWER CORRECT ANSWER It is convenient and easy to use. It takes into account the time value of money. It identifies various risk levels within a project. It accounts for timing of project cash flows. 65. What describes an ideal criterion for the method used to evaluate a capital investment project? Module 12, Pg. 187YOUR ANSWER CORRECT ANSWER The method must account for the time value of money. The method must account for the success of previous projects. The method must consider sales of previous products as a benchmark. The method must consider only the cash flows of the payback period of the investment. 66. How is the payback period method applied to capital project analysis? YOUR ANSWER CORRECT ANSWER In determining time to recapture the initial investment In calculating the ratio of payoff to investment In comparing investments with unequal life spans In calculating actual annual profitability 67. What is a shortcoming of the internal rate of return (IRR) method? YOUR ANSWER CORRECT ANSWER It is mistakenly used to represent the actual annual profitability of an investment. It does not account for the time value of money (TVM). It quantifies the amount of value created per unit of investment. It does not indicate the dollar profit earned by the investment.YOUR ANSWER CORRECT ANSWER Module 6, pg. 91 Module 4, pg. 50 Module 5, pg. 67 Module 7, pg. 103 Module 8, pg. 113 Module 9, pg. 136 Module 11, pg. 174 Module 12, Pg. 187 [Show Less]