NEWP RACTICE EXAM SOLUTION FOR FNAN – EXAM 2022
1. all successful companies must sell their products/services at prices that are high enough to
cover all operating costs & to compensate owners and creditors for their exposure to risk
2. produce at a low cost or provide a better service/product or have attractive location/delivery -
CORRECT ANSWER what are the 2 requirements for a firm to be successful?
1. successful companies have skilled people
- executives
long-term visions, smart, experienced, aware of operating environment and challenges
- middle management
loyal, intelligent, understand the goals and mission, hard working
- labor
force-talented, dedicated, knows management supports them
2. have strong relationships with groups outside of the company
- suppliers ; know their customers requirements &e expectations
- customers ; company knows who their customers are, their desires and expectations
3. have sufficient capital to execute plans and support operations
Internal Funds > Retained Earnings = non distributed profits (balance sheet & contribution from
Income statement)
External Funds > band loans, issue bonds, stock bonds - CORRECT ANSWER what are the 3
key attributes common to successful companies?
Agency Theory - CORRECT ANSWER a supposition that explains the relationship between
principals and agents in business
Stock Price (under the control of management) is a FUNCTION of expected cash flows, timing
of cash flows, risk of cash flows, dividend policy & capital structure
> stock price = function (ECF,TCF,RCF,DP,CS)
> EFC ; the higher the EFC the higher the stock price
> TCF ; when it will occur, the sooner we receive it the better
> RCF ; uncertainty, the higher the risk the lower the value
> DP ; how much they will pay out
, > CS ; the financing mix, how the firm is financed - some debt is good for capital structure, too
much debt is bad - CORRECT ANSWER write/describe the stock value function-model?
Internal Financing - CORRECT ANSWER financing derived from the savings of a country's
citizens
Liquidity Ratios - CORRECT ANSWER measures if the firm can pay its bills and if the firm has
adequate current assets to meet its obligations
Corporation - CORRECT ANSWER a company or group of people authorized to act as a single
entity (legally a person) and recognized as such in law
Activity Ratios - CORRECT ANSWER measure the speed with which various accounts are
converted into sales or cash, (inflows or outflows)
Depreciation - CORRECT ANSWER the allocation of the cost of a fixed asset over some
prescribed time period
NOT a valuation process
reducing book value
Retained Earnings - CORRECT ANSWER the amount of net income retained in the corporation
Cash Flow from Operations - CORRECT ANSWER cash flows that are directly related to the
production and sale of the firm's products/services
Profitability Ratios - CORRECT ANSWER ratios that measure the rate of return a firm is earning
on various measures of investment
Debt Ratios - CORRECT ANSWER (total liabilities/assets)
> how much debt is being used in the financial structure?
> how much financial leverage we have?
> how much financial risk?
1. all successful companies must sell their products/services at prices that are high enough to
cover all operating costs & to compensate owners and creditors for their exposure to risk
2. produce at a low cost or provide a better service/product or have attractive location/delivery -
CORRECT ANSWER what are the 2 requirements for a firm to be successful?
1. successful companies have skilled people
- executives
long-term visions, smart, experienced, aware of operating environment and challenges
- middle management
loyal, intelligent, understand the goals and mission, hard working
- labor
force-talented, dedicated, knows management supports them
2. have strong relationships with groups outside of the company
- suppliers ; know their customers requirements &e expectations
- customers ; company knows who their customers are, their desires and expectations
3. have sufficient capital to execute plans and support operations
Internal Funds > Retained Earnings = non distributed profits (balance sheet & contribution from
Income statement)
External Funds > band loans, issue bonds, stock bonds - CORRECT ANSWER what are the 3
key attributes common to successful companies?
Agency Theory - CORRECT ANSWER a supposition that explains the relationship between
principals and agents in business
Stock Price (under the control of management) is a FUNCTION of expected cash flows, timing
of cash flows, risk of cash flows, dividend policy & capital structure
> stock price = function (ECF,TCF,RCF,DP,CS)
> EFC ; the higher the EFC the higher the stock price
> TCF ; when it will occur, the sooner we receive it the better
> RCF ; uncertainty, the higher the risk the lower the value
> DP ; how much they will pay out
, > CS ; the financing mix, how the firm is financed - some debt is good for capital structure, too
much debt is bad - CORRECT ANSWER write/describe the stock value function-model?
Internal Financing - CORRECT ANSWER financing derived from the savings of a country's
citizens
Liquidity Ratios - CORRECT ANSWER measures if the firm can pay its bills and if the firm has
adequate current assets to meet its obligations
Corporation - CORRECT ANSWER a company or group of people authorized to act as a single
entity (legally a person) and recognized as such in law
Activity Ratios - CORRECT ANSWER measure the speed with which various accounts are
converted into sales or cash, (inflows or outflows)
Depreciation - CORRECT ANSWER the allocation of the cost of a fixed asset over some
prescribed time period
NOT a valuation process
reducing book value
Retained Earnings - CORRECT ANSWER the amount of net income retained in the corporation
Cash Flow from Operations - CORRECT ANSWER cash flows that are directly related to the
production and sale of the firm's products/services
Profitability Ratios - CORRECT ANSWER ratios that measure the rate of return a firm is earning
on various measures of investment
Debt Ratios - CORRECT ANSWER (total liabilities/assets)
> how much debt is being used in the financial structure?
> how much financial leverage we have?
> how much financial risk?
