SOPHIA PATHWAYS Principals of Finance Milestone 1,2,3,4 with correct answers.

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1

After a significant economic recession, prices and investing activity in the stock market began trending consistently
upward six years ago. In the last three months, this trend has reversed and prices have fallen steadily.

How are the past three months of the stock market classified?



Primary bull market


Primary bear market


Secular bull market


Secular bear market
CONCEPT
Financial Markets
2

If Company A has a lower debt ratio than Company B, then Company A is likely to have __________ than
Company B.



more total assets


less financial flexibility


a greater ability to borrow


a higher level of financial risk
CONCEPT
Debt Management Ratios
3

Ratios that measure a company's ability to manage its long-term debt are _________.



profitability ratios


leverage ratios


efficiency ratios


liquidity ratios
CONCEPT
Overview of Ratio Analysis
4

Preparing a cash flow forecast helps a company to avoid __________.



liquidity



, net losses


higher financing costs


opportunity costs
CONCEPT
Building a Cash Budget
5

Xander is looking for ways to reduce his non-operating expenses to improve his company's overall financial
performance, so he consults his most recent income statement.

Which of the following should he focus on?



Depreciation


Income taxes


Amortization


Wages
CONCEPT
The Income Statement
6

The pro forma balance sheet shows how the __________ resulting from a strategic plan will be financed.



sales forecast


inventory


AFN


equity
CONCEPT
Forecasting the Balance Sheet
7

Capacity planning answers the question "__________"



How can we be most efficient?


What will our revenue be?


How will we decide which direction to go?


How will we finance it?
CONCEPT
Financial Forecasting
8

,Consider the price to book ratios of the following companies:
 Company A: 5.45
 Company B: 14.30
 Company C: 10.08
 Company D: 19.62
Which company do investors believe will create the most value from its assets?



Company B


Company C


Company D


Company A
CONCEPT
Market Value Ratios
9

Why are ethical issues complicated for businesses that operate in the global economy?



Because their employees won't know what the laws are in other countries.


Because different cultures have different norms and values.


Because they don't have as much moral character as small, local businesses.


Because they tend to have more employees.
CONCEPT
Ethics: An Overview
10

Under what circumstance would agency conflict be most likely to increase?



When oversight by the board is adequate.


When the incentives of a manager align with those of owners.


When owners are very close to the business.


When owners are separated from the business.
CONCEPT
Agency and Conflicts of Interest
11

Which of the following would explain a company’s day sales outstanding ratio rising from 32 to 41.25?



The company's accounts receivable has decreased while the average inventory has increased.


The company's accounts receivable has decreased while total sales has increased.

, 
The company's accounts receivable has decreased while the average inventory has remained constant.


The company's accounts receivable has remained constant while total sales has decreased.
CONCEPT
Asset Management Ratios
12

If net income is $90 million and total assets are $480 million, then the ROA is __________.



incalculable without EBIT data


18.75%


25.00%


incalculable without gross profit data
CONCEPT
Profitability Ratios
13

In which scenario would benchmarking be least useful?



Comparing financial ratios of a company in an extractive industry and a tertiary industry


Comparing financial ratios of a company in a tertiary industry and a service industry


Comparing financial ratios of a company in a primary industry and an extractive industry


Comparing financial ratios of a company in a secondary industry and a manufacturing industry
CONCEPT
Using Financial Ratios for Analysis
14

If a sales increase is forecasted, how will it affect expenses on the pro forma income statement if
market conditions are expected to remain stable?



Expenses will increase.


Expenses will decrease.


It depends on the type of product being sold.


There will be no effect on expenses.
CONCEPT
Forecasting the Income Statement
15