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C214- Practice Tests
| Question | Answer |
|---|---|
| The goal of a public corporation is to | maximize shareholder wealth/stock price |
| What does Beta measure? | Beta measures stock’s market risk relative to market |
| What determines the prices of financial securities? | Security prices = PV of expected future cash flows |
| Which does not affect the required yield on a bond? | Coupon rate does not determine required yield |
| What factors affect the dealer bid/ask spread? | Volatility and trading frequency affect spreads |
| The primary market is characterized by | Primary market = firms raising capital |
| Junk bonds are those whose rating is below | Below BBB = junk/speculative |
| Diversification protects against | Individual firm risk |
| Why is stock valuation so difficult? | Estimating future profits are difficult |
| If Accounts Receivable increases, what is impact on cash flow? | Increases |
| The DFN framework states that firm growth is limited by | Growth of equity |
| Income statement differs from cash flow because of | Income statement uses accrual accounting |
| What are the impacts of tariffs? | More jobs and more expensive products |
| Which measures a firms ability to produce and sell at a profit? | Cash Flow Operations |
| If IRR is greater than the required return, an adopted project, | Increases shareholder value |
| Why would financial leverage affect required return? | Increased profit volatility/risk |
| EBIT is used to calculate | operating margin |
| Which type of bond has tax exempt interest payments? | Municipal bond interest is tax exempt |
| How does collateralization impact the yield of a bond? | Lower yield due to less risk |
| How might a firm increase its SGR? | Higher margins and turnover raise SGR |
| Which measure is usually the highest? | Gross margin is usually highest |
| In the Comparables method of firm valuation, which ratio is used? | Price-Earnings Ratio |
| The return to stock holders does not include: | Return of principal |
| Which is best measure of a firm's profitability? | CFO best measure of profitability quality, Cash flow operations |
| Which income statement items are deleted from cash flows? | Credit sales and depreciation adjusted in CFO |
| How are bonds different from stock? | 1. Bond investors are part owners of the corporation 2. Redemption of the security is mandatory |
| What is a secured bond? | Secured bonds backed by collateral |
| Which ratio is used to evaluate a firm's capacity to pay bills? | Current ratio measures bill-paying ability |
| What is the "market risk premium"? | Market return − Treasury rate |
| In the Gordon model, what would cause increased stock price? | Higher growth rate raises Gordon value |
| A bond's S&P rating estimates the bond's | Bond ratings measure default/credit risk |
| How does preferred stock differ from common stock? | Preferred has fixed dividends + bankruptcy priority |
| What is systematic risk? | Systematic risk affects all stocks |
| If Accounts Payable increase, what is impact on cash flow operations? | Increases |
| Sarbanes Oxley Act requires | Audit of internal controls |
| Why should a firm seek to minimize the Cash Cycle? | Lower cash cycle reduces financing needs |
| According to CAPM, what would a cause a required return to increase? | increase in Beta |
| Which addresses the problem of large banks failing? | Dodd-Frank addressed financial crisis/banks |
| Which of the following would be a Spontaneous account? | A/R changes naturally with sales |
| Which is not a reason for a firm to prefer debt issuance over stock issuance: | Debt increases bankruptcy risk, not reduces |
| What functions does FINRE perform? | oversees ethics, testing, practices |
| How are credit sales recorded on the balance sheet? | Credit sales create A/R |
| If firm A has greater leverage than B, in an increase in sales: | Higher leverage magnifies profits |
| The addition to retained earnings each year is: | Net Income minus dividends |
| What factor affects a firm's cost of capital? | a. Operating leverage b. Financial leverage c. Sales volatility |
| the systematic risk in a portfolio is highest if | Average Beta is high |
| Why might a country devalue it currency? | to promote exports |
| Why is CAPM better than Gordon model for estimating required return? | CAPM uses real market data |
| Why is it difficult to use Gordon model to estimate required return? | Growth rate estimation is difficult |
| Which causes a decrease in CFO? | Increase in Inventory & Decrease in A/P |
| Which is the best indicator of a firm's core business? | CFO reflects core operations |
| Which is excluded from CFF | Change in retained earnings |
| Which of the following is true? | Ratios are informal analytical tools |
| Why is inventory excluded from the Quick Ratio? | It is the least liquid current asset |
| If a firm's ROE is higher than industry average, | Higher ROE means greater profitability |
| Which is true about the current ratio? | Creditors want a high ratio & the firm wants a low ratio |
| How are preferred and common stock different? | Only common has voting rights. |
| Because it has a mix of bond and stock features, preferred stock is called | Preferred stock = hybrid security |
| A stock is a good investment if | the price is less than intrinsic value |
| What causes a stock to have a higher required return? | Higher beta → higher required return |
| Which model uses real market price statistics? | Capital Asset Pricing Model |
| The stock risk premium is compensation for | Risk premium compensates for systematic risk |
| Which stock value model is used by equity analysts? | Analysts use both valuation models a. Gordon Growth b. CAPM |
| The percent of sales method is used for | a. Spontaneouse accounts b. Current Assets |
| a firm's Sustainable Growth Rate is limited by | The increase in equity |
| Why are firms reluctant to sell stock after their IPO? | Stock issuance may signal weakness |
| The ratio of dividends to net income is called | Dividends / NI = payout ratio |
| Income not paid out in dividends is added to | Undistributed income goes to retained earnings |
| What is the primary reason for outsourcing? | Outsourcing mainly lowers production costs |
| Which is not a risk in international operations? | Systematic risk exists domestically too |
| nventory costs include | a. Storage cost b. Holding Cost c. Financing cost |
| Which is not a part of managing A/R? | Inventory levels relate to inventory management |
| What is the cash cycle? | Period from paying supplier to receiving customer cash |
| Which factor affects a firm's capital structure? | a. Volatiity of sales d. Degree of operating leverage c. Firm size |
| Why is scrubbing the data crucial when comparing a company with its peers through ratio analysis? | To adjust for differences in fiscal year-ends and accounting practices among companies |
| crubbing the data involves making sure that a company’s financial statements are | omparable to those of its peer group, addressing timing differences due to different fiscal year-ends, and reconciling accounting differences, such as varying depreciation methods |
| Which difficulty may arise when performing ratio analysis for seasonal businesses? | Seasonal variations make it challenging to compare ratios across firms if the reporting dates of the company’s financial statements are different. |
| ROE, calculated as Net Income divided by Owner’s Equity, evaluates the | eturn earned on the equity invested by the company’s shareholders |
| Which factor is an example of an external risk that should be considered in an integrated financial analysis of a firm? | Changes in competitive forces due to economic turndown |
| Changes in competitive forces due to economic turndown | stream of annual or semiannual interest payments and a final principal repayment |
| How is the How is the number of periods (n) calculated for a bond paying semiannual coupons? | It is multiplied by 2. |
| In the case of bankruptcy, what represents a primary difference in the claim hierarchy between common and preferred stockholders? | Preferred stockholders have a higher claim on company assets in case of liquidation. |
| In the event of a company’s liquidation, | preferred stockholders have a higher claim on assets compared to common stockholders. |
| What is a key advantage of holding common stock over preferred stock? | Potential for capital appreciation |
| What is the book value per share if a company’s total equity is $200 million and it has 20 million shares outstanding? | $10 |
| A company with a market capitalization of $500 million has net income of $25 million. What is the company’s earnings per share (EPS) if it has 10 million shares outstanding? | $2.50 |
| A company is expected to pay a dividend of $1.80 next year, which is expected to grow at a rate of 7% per year indefinitely. The required rate of return on the company’s stock is 11%. What is the value of the stock using the Gordon growth model? | $45.00- The value is D1/(k − g) = $1.80/(0.11 − 0.07) = $45.00. |
| A company plans to pay $4.12 for its next dividend. The dividends are expected to grow at 3% annually, and the required rate of return is 11%. What is the value of the stock using the Gordon growth model? | $51.50 |
| What is the impact of portfolio diversification on expected returns? | It reduces the variability of expected returns. |
| What is the primary purpose of diversification in a portfolio? | To reduce the idiosyncratic risk |
| Diversification spreads investment across various assets, reducing the impact of | any one asset’s performance on the entire portfolio. |
| In the capital asset pricing model (CAPM), what is the significance of the market risk premium? | It is the extra return over the risk-free rate expected from the market. |
| What does the capital asset pricing model (CAPM) imply about stocks with a beta greater than 1? | They are more volatile than the market. |
| An investor is considering putting money into a start-up company. They ask for the company’s projected statement of cash flows for the next period. How will this help the investor evaluate the start-up’s projected performance? | It will show the cash flows the firm expects from operating, investing, and financing activities. |
| In the statement of cash flows, why is depreciation expense added back to net income when calculating cash flows from operations (CFO)? | Because it is a non-cash expense |
| What effect does a currency devaluation have on a country’s international trade? | It makes a country’s exports cheaper internationally. |
| How does global financing integration benefit corporations? | It provides access to a wider range of funding sources and investment opportunities. |
| What is an auction market in secondary financial markets? | A market that operates where prices are determined by the highest bidder |
| Why are efficient, well-developed financial markets important for stock pricing? | They produce more reliable stock prices. |
| Which capital budget budgeting method is used by firms that wish to recover their invested capital as quickly as possible? | Payback |
| Which factor is most likely to lead a company to increase its leverage | Tax shield benefits from debt financing |
| Tax shield benefits provide an incentive for companies to increase leverage by using debt, which | has tax-deductible interest expenses |
| whas tax-deductible interest expenses | Larger companies can often borrow at lower rates |
| Larger companies can often borrow at lower rates | It reduces the amount of working capital tied up in inventory. |
| A JIT inventory system aims to align inventory orders with production schedules, thereby reducing the | amount of inventory on hand and subsequently the amount of working capital tied up in inventory. |
| Which financial ratio is best used to assess the efficiency of a firm’s credit policy? | Receivables turnover |
| Receivables turnover measures how effectively a company | extends credit and collects debts. |
| What is float in cash management? | The time delay between writing a check and the actual cash outflow |
| Float refers to the time delay between the issuance of a | payment and the actual movement of funds, affecting the timing of cash flows. |
| What is the operating balance in the context of cash management? | The amount of cash the firm needs to pay its immediate bills |
| Why should a firm not carry too much cash? | To avoid incurring large opportunity costs |
| What is the primary role of the U.S. Securities and Exchange Commission (SEC)? | To regulate capital markets and protect investors |
| The SEC’s main role is to regulate capital markets and | and protect investors by enforcing financial laws and regulations. |
| What is one of the roles of the Securities and Exchange Commission (SEC) in initial registration for public companies? | Ensuring public disclosure of financial data |
| What must a company file with the Securities and Exchange Commission (SEC) after the company goes public? | Form 10-Q and Form 10-K |
| Public companies are required to file quarterly | (Form 10-Q) |
| Public companies are required to file annual reports | (Form 10-K) |
| According to the Sarbanes-Oxley Act (SOX), what must a company’s annual report include regarding internal control? | According to the Sarbanes-Oxley Act (SOX), what must a company’s annual report include regarding internal control? |
| CAPM Model | Equity based on expected market return and risk free rate |
| Beta is a measure of... | risk, is used to determine the cost of common equity |
| Beta greater than 1 implies | the stock is more volatile than the market and vice versa |
Created by:
mnapole