Financial Management PA Questions and Answers, Exams of Financial Economics

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Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] How can a private firm appropriately maximize shareholder value? - By increasing the firm's stock price - By reducing the firm's labor - By making decisions that keep the control of the business with the owners - Correct Answer By making decisions that keep the control of the business with the owners Why are American regulators focused on international investing in a global marketplace? - Because international investing in a global marketplace is the concern of American investors - Because an exclusively domestically focused regulatory approach is still effective - Because weaving international concerns into domestic policy is cost-effective - Because other jurisdictions have the same priorities and solutions as the United States - Correct Answer Because international investing in a global marketplace is the concern of American investors What is one of the two basic types of financial instruments? Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] - Checking accounts - Bonds - Euros - Hedge funds - Correct Answer Bonds What are the likeliest outcomes if a company outsources the manufacturing of its products to a foreign country? Choose 2 Correct Answer s. - Consumer prices will decrease. - Tariffs will decrease. - Domestic wages will increase. - Production capacity will decrease. - Domestic employment will decrease. - Correct Answer Consumer prices will decrease. Domestic employment will decrease. What do the content and structure of a balance sheet report? - The gains and losses at a point in time - The revenues and expenses for a period of time - The assets, liabilities, and equity at a point in time Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] $5,300 inflow $5,300 outflow - Correct Answer $5,300 outflow What is the basic equation for a balance sheet? Revenue + expenses = income Assets = Liabilities − Equity Revenue + Assets = Equity Assets = Liabilities + Equity - Correct Answer Assets = Liabilities + Equity What do cash flows from investing activities generally relate to? A firm's debt and equity transactions A firm's purchase and sale of long-term assets A firm's sale of goods and services Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] A firm's non-cash transactions - Correct Answer A firm's purchase and sale of long-term assets Which transaction is reflected in cash flow from operating activities? Amortization expense Gain or loss on the sale of property, plant, and equipment Credit sales to customers Cash sales to customers - Correct Answer Cash sales to customers What does free cash flow represent? Cash flows from operating activities Cash balance at the end of the period Cash available for distribution after funding required reinvestment Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Cash available for dividends - Correct Answer Cash available for distribution after funding required reinvestment An analyst is comparing the ratios of two firms and needs to address timing differences What is an example of a timing difference between these two firms? The firms have different fiscal years. The firms are in different industries. The firms use different depreciation methods. The firms use different inventory methods. - Correct Answer The firms have different fiscal years. A company's year-end balance sheet for 2013 shows the following: Accounts Receivable: $900 Inventory: $1,200 Fixed Assets: $1,000 Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] $121,551 $121,665 $125,000 - Correct Answer $121,665 An accountant is 40 years old and has an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement. How much will this accountant have upon retirement, if the accountant is able to earn 4% annually on this investment? $180,000 $336,510 $349,970 $442,000 - Correct Answer $336,510 Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest-bearing account. The last cash flow is received one year prior to the end of the tenth year. What is this investor's future balance after 10 years? $24,012 $24,973 $26,012 $26,973 - Correct Answer $24,973 What is the par value (face value) of a bond? The interest accrued on the bond through expiration The sum of money that the corporation promises to pay upon expiration of the bond The transaction costs associated with bond issuance Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] The coupon yield of the bond - Correct Answer The sum of money that the corporation promises to pay upon expiration of the bond A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead this broker to purchase shares in this company? A recent buying frenzy has driven the current price 50% higher than the previous trailing 12- month high price. The current price of the stock is 25% below its intrinsic value. The broker receives a tip that the company is about to announce a market breakthrough, and the price is above intrinsic value. Intrinsic value is 25% below the current stock price. - Correct Answer The current price of the stock is 25% below its intrinsic value. A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend. (The ex-dividend date is not a consideration; the broker will receive the full $2.25.) The broker expects a 12% rate of return. Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] $748 $1,000 $1,200 $1,548 - Correct Answer $1,000 Which statement is true about fluctuations in bond prices? When market interest rates fluctuate, the bond coupon rate is unchanged. When market interest rates are stagnant, the bond coupon rate fluctuates. When market interest rates fluctuate, the bond coupon rate fluctuates. When the market interest rates fluctuate, the required rate of return equals the bond coupon rate. - Correct Answer When market interest rates fluctuate, the bond coupon rate is unchanged. Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on this company's bonds? 3.53% 7.06% 10.00% 12.46% - Correct Answer 7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? Treasury bonds Corporate bonds Foreign bonds Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Municipal bonds - Correct Answer Municipal bonds A bond pays $27.50 semiannually, matures in nine years, and is currently priced at $1,090. What is the yield to maturity for this bond? 3.80% 4.28% 5.00% 6.31% - Correct Answer 4.28% A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)? Higher than the coupon rate Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] There is a linear decrease in risk. Risk decreases at a slower rate. All risk can be diversified away. Risk remains constant. - Correct Answer Risk decreases at a slower rate. The figure below represents a portfolio that plots the expected return against the risk of each investment: Where along this line will a highly risk-averse investor likely be? A1 C1 D2 D3 - Correct Answer C1 Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] What are two primary benefits of the capital asset pricing model (CAPM)? Choose 2 Correct Answer s. CAPM provides a way to forecast actual return for stocks. CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required return. CAPM provides a way to adjust a portfolio to a market beta of one (1). - Correct Answer CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required return. A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt of 6%, a cost of preferred equity of 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What is this company's weighted average cost of capital? Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] 6.5% 7.2% 8.8% 9.7% - Correct Answer 9.7% Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available? Choose 2 Correct Answer s. Increasing sales prices Altering capacity Increasing dividend payouts Increasing costs - Correct Answer Increasing sales prices Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Accept when the internal rate of return equals the net present value Accept when the net present value is positive - Correct Answer Accept when the project return is greater than the required return A company would like to invest in a capital budget project that will be worth $500,000 in 40 years. How much should this company invest today, assuming an average inflation rate of 2% and a 10% annual return? $11,047 $23,015 $24,393 $10,248,724 - Correct Answer $24,393 Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long-term debt of $150 million, and a market value of short-term debt of $150 million. The cost of equity is 12%, the cost of long-term debt is 8%, and the cost of short-term debt is 6%. The marginal tax rate is 35%. What is the weighted average pre-tax cost of capital (WACC) for this company? 7.53% 8.16% 8.37% 9.00% - Correct Answer 9.00% Which advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? CAPM does not rely on an estimate of the market risk. Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] CAPM is tied to relative market risk, which provides a less reliable estimate growth. CAPM considers risk of a stock relative to the market to determine expected return. The relative market risk is always constant. - Correct Answer CAPM considers risk of a stock relative to the market to determine expected return. Why do companies strive for a lower cost of capital? Less money dedicated to financing means more money is available for production and operations. More money dedicated to financing means more money is available for production and operations. A lower cost of capital positively affects credit rating. A lower cost of capital means a higher debt-to-equity ratio. - Correct Answer Less money dedicated to financing means more money is available for production and operations. A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. It estimates cash will be 7% of projected Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Shareholders' equity is $1.5 million. Pro forma income is $3.6 million. The company has no long-term debt.What is the discretionary financing needed? $1.2 million $5.1 million $6.3 million $6.9 million - Correct Answer $1.2 million Which three pieces of data are needed to perform a capital budget analysis? Choose 3 Correct Answer s. Annual cash flows for the life of the new project Cash flow when the firm terminates the project Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] The estimated value of the firm's stock price The initial cost of the new project The estimated value of the firm's capital assets - Correct Answer Annual cash flows for the life of the new project Cash flow when the firm terminates the project The initial cost of the new project What are two examples of sunk costs? Choose 2 Correct Answer s. The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point The cost of scrapping an old machine to replace with a new machine Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] The cost of disposing an old asset - Correct Answer The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point Company A has a degree of operating leverage of 1.85, and Company B has a degree of operating leverage of 6.5. What does the degree of operating leverage say about these two companies? Company A has lower risk than Company B. Company A must have a lower increase in sales than Company B to achieve the same operating income. Company A has lower debt than Company B. Company A has higher fixed costs than Company B. - Correct Answer Company A has lower risk than Company B. Which action is an important part of managing accounts receivable? Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Company Y has a greater degree of financial risk than Company Z. What would be a result of a 1% decrease in EBIT for both companies? A greater percentage decrease in Company Y's pre-tax profit A greater percentage decrease in Company Z's pre-tax profit A greater percentage increase in Company Z's pre-tax profit A greater percentage increase in Company Y's pre-tax profit - Correct Answer A greater percentage decrease in Company Y's pre-tax profit How does the anticipation of bankruptcy affect a firm's capital structure? A firm facing bankruptcy will increase the relative amount of debt in order to increase payment to creditors rather than shareholders. A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs. Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] A firm facing bankruptcy is not affected by any costs and therefore does nothing to restructure capital. A firm facing bankruptcy is exempt from repaying debt and therefore restructures its capital structure towards debt. - Correct Answer A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs. Why would a company prefer to raise capital by issuing debt instead of issuing new equity? Debt financing provides greater solvency risk. Debt financing provides interest tax benefits. Debt financing provides less shareholders' control. Debt financing provides optimal capital structure. - Correct Answer Debt financing provides interest tax benefits. Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets? Common stock Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Convertible bond Preferred stock Treasury bond - Correct Answer Preferred stock How will an increase in corporate tax rates affect a firm's cost of capital? The cost of debt will decrease. The cost of debt will increase. The cost of equity will decrease. The cost of equity will increase. - Correct Answer The cost of debt will decrease. Which financial ratio is used to measure a company's effectiveness in extending credit as well as collecting debts? Accounts receivable turnover Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] Disclosure of off-balance sheet debts Monthly evaluation of internal controls Publication of detailed prospectus for investors Announcement of annual public shareholder meetings - Correct Answer Disclosure of off- balance sheet debts Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933? Prospectus Annual report 10-K 10-Q - Correct Answer Prospectus Financial Management (C214) – PA Questions and Answers, [Solved and Well Defined Rated A+.] What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and the SEC? Sales practices Purchase practices Payroll practices Production practices - Correct Answer Sales practices What did the Dodd-Frank Act seek to prevent? Banks making loans to borrowers with low incomes Financial institutions becoming too big to fail Conflicts of interest in audits by accounting firms The loss of capital gains by large institutional investors - Correct Answer Financial institutions becoming too big to fail