C214 Financial Management Objective Assessment
Review Questions With 100% Correct Answers
If accounts receivable increases, what is impact on CFO?
CFO decreases
What is the "required return" of a stock or bond?
The minimum yield necessary to induce investors to buy the security
Are actual taxes paid the same as shown on GAAP income statement?
No. Actual taxes based on IRS rules while income statement based on GAAP
Which decisions require using subjective estimates?
Economic life of a new asset and depreciation of asset
If there is a 30% chance of a recession, what is the probability of expansion?
70% - - the sum of the probabilities must equal 100%
How much interest is paid on a 6% bond over 2 years and 3 months? (Simple Interest)
6% x 1000 = $60 per year $60 x 2.25 = $135
How does a "prudent investor" select investments?
Seeks the highest return for "appropriate" amount of risk
What do points on the Efficient Frontier measure?
The maximum return for a given level of risk; maximum Return-to-risk ratio
What is Beta?
Measure of volatility of a stock's risk relative to the market
Why are accurate forecasts important?
Plan for resources to support production and financing
Which ratio is used in valuing a private company?
PE ratio in the Comparable Multiples method
What are the 4 costs associated with holding inventory?
Product, storage, holding, and opportunity
What risk is eliminated by a diversified portfolio?
Idiosyncratic risk - risk affecting a single firm
, What is the "secondary market"?
Investors trading securities among themselves after initial issuance of securities
What are the impacts of outsourcing?
Fewer U.S. jobs and lower priced products
What are the impacts of tariffs?
More U.S. jobs and higher product costs for consumers
What securities are exempt from federal income taxation?
Municipal bond interest is tax-exempt.
Why would a firm prefer to issue debt rather than stock?
Debt has lower required return; debt interest is tax deductible
What happens to APY as the number of interest payment periods per year increase?
APY increases
What is the present value of future cash flows of a stock called?
Intrinsic value = it is the "real" value of the stock
What indicates if a stock is a "good investment"?
The price of the stock is less than the "intrinsic value"
In event of bankruptcy, what is the order of claims settlement?
Secured debt, senior debt, subordinated debt, Preferred stock, Common stock.
What is a spontaneous account?
One that changes with the level of sales - - current assets & liabilities.
What is a discretionary account?
One that changes due to management decision - - bonds outstanding.
If the financial ratios of 2 firms are compared, what is it called?
Cross-sectional analysis
If a loan does not require collateral, what is it called?
Unsecured loan (or bond)
What transaction do firms use to offset foreign exchange risk?
Hedging through "futures" and "forward" contracts
If the debt ratio increases, what is the impact on ROE?
Review Questions With 100% Correct Answers
If accounts receivable increases, what is impact on CFO?
CFO decreases
What is the "required return" of a stock or bond?
The minimum yield necessary to induce investors to buy the security
Are actual taxes paid the same as shown on GAAP income statement?
No. Actual taxes based on IRS rules while income statement based on GAAP
Which decisions require using subjective estimates?
Economic life of a new asset and depreciation of asset
If there is a 30% chance of a recession, what is the probability of expansion?
70% - - the sum of the probabilities must equal 100%
How much interest is paid on a 6% bond over 2 years and 3 months? (Simple Interest)
6% x 1000 = $60 per year $60 x 2.25 = $135
How does a "prudent investor" select investments?
Seeks the highest return for "appropriate" amount of risk
What do points on the Efficient Frontier measure?
The maximum return for a given level of risk; maximum Return-to-risk ratio
What is Beta?
Measure of volatility of a stock's risk relative to the market
Why are accurate forecasts important?
Plan for resources to support production and financing
Which ratio is used in valuing a private company?
PE ratio in the Comparable Multiples method
What are the 4 costs associated with holding inventory?
Product, storage, holding, and opportunity
What risk is eliminated by a diversified portfolio?
Idiosyncratic risk - risk affecting a single firm
, What is the "secondary market"?
Investors trading securities among themselves after initial issuance of securities
What are the impacts of outsourcing?
Fewer U.S. jobs and lower priced products
What are the impacts of tariffs?
More U.S. jobs and higher product costs for consumers
What securities are exempt from federal income taxation?
Municipal bond interest is tax-exempt.
Why would a firm prefer to issue debt rather than stock?
Debt has lower required return; debt interest is tax deductible
What happens to APY as the number of interest payment periods per year increase?
APY increases
What is the present value of future cash flows of a stock called?
Intrinsic value = it is the "real" value of the stock
What indicates if a stock is a "good investment"?
The price of the stock is less than the "intrinsic value"
In event of bankruptcy, what is the order of claims settlement?
Secured debt, senior debt, subordinated debt, Preferred stock, Common stock.
What is a spontaneous account?
One that changes with the level of sales - - current assets & liabilities.
What is a discretionary account?
One that changes due to management decision - - bonds outstanding.
If the financial ratios of 2 firms are compared, what is it called?
Cross-sectional analysis
If a loan does not require collateral, what is it called?
Unsecured loan (or bond)
What transaction do firms use to offset foreign exchange risk?
Hedging through "futures" and "forward" contracts
If the debt ratio increases, what is the impact on ROE?
