D076 EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED GRADED A++

D076 EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED GRADED A++ Terms in this set (320) In which way is accounting different from finance? Accounting is backward looking, while finance is focused on the future. What is the main question that both individuals and companies must consider when making financial decisions to reach a goal? Will the benefits of the action outweigh the costs? 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 How can investing help a person reach personal financial goals? It provides access to potential revenue or increases in value to help meet goals faster. A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? Primary market Which type of economic indicator changes after the economy changes and helps identify trends in the long term? Lagging indicator How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy? By providing individuals and firms access to financial markets to buy or sell financial securities Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn? Leading indicator Suppose an individual does not eat chocolate because eating chocolate goes against his personal beliefs. Which type of standard is this? Moral Which action is based upon moral standards? Although there is no company policy regarding it, a financial manager chooses not to accept gifts from the company's clients to ensure that she does not create a conflict of interest. What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects? Set strict covenants that the company cannot uphold if it chooses a risky project What is the term for an individual's beliefs concerning what is and is not acceptable to personally do? Morals Which factor contributes to the inflation of the prices of goods and services over time? Increase in demand for goods and services Why can compounding interest be a good tool but also a significant detriment? Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest. Which component of the required rate of return takes into account the loss of potential gain from other alternatives? Opportunity cost How is inflation calculated? Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy. Based on the following information about the stocks of several companies, which stock displays the greatest amount of risk? Stock A: Return = 22.22%, Standard Deviation = 9.99% Stock B: Return = 15.05%, Standard Deviation = 7.35% Stock C: Return = 38.83%, Standard Deviation = 4.54% Stock D: Return = 5.69%, Standard Deviation = 5.32% Stock A What is the relationship between risk and return? The higher risk an investor takes, the higher return the investor expects to receive. Maya is considering purchasing stock in a certain company. Her financial advisor suggests that she purchase stocks in multiple companies instead of just one. Which risk management technique is this financial advisor suggesting? Risk diversification An energy company discovers that a new bill has been proposed to change the amount of fuel that can be exported outside the country. If passed, this could have a serious negative effect on the company's revenues. Some of the company's competitors are obtaining insurance policies to compensate for this risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do nothing— ultimately taking responsibility for this particular risk instead of trying to transfer the risk through an insurance policy. Which risk management technique is this choice an example of? Risk retention Which type of ratio should be used to examine the cost efficiency of a firm's production? Profitability What is the process of analyzing financial data with ratios to compare a firm's performance to competitors? Benchmarking Which action will increase the return on equity of a firm? Increasing the asset usage efficiency of the firm Which principle of ratio analysis means that ratios are open for analyst interpretation, are not governed by rules, and allow creativity to work according to a particular company or asset? Flexibility Why might an investor be concerned by how Company A is achieving its higher- than-industry return on equity? The company's significantly higher use of debt could present a financial risk. As an active investor, Maria is analyzing her portfolio to decide if there are any stocks she should remove from her pool of financial securities. A company she has invested in, Quiet Flag Industries, just released its annual report. Which kind of method should Maria use to see if the company has improved? Trend analysis Which type of ratios are banks and lenders most concerned about? Liquidity Which ratio helps an analyst evaluate whether a company can cover its short- term obligations? Current ratio Given the table above, what does the DuPont framework indicate about return on assets? All returns are based on the firm's profitability and efficiency.