C214 Financial Management Questions And Answers

What 3 items are needed to calculate WACC? - Answer- Market value and required return of each fund source and the tax rate; hint: see the formula sidebar What 3 items are needed to calculate CAPM? - Answer- The Market Return, Risk Free Rate, and Beta; hint: see formula sidebar If another source of funds is added, what happens to WACC? - Answer- It changes Which will be larger: actual taxes payable or accounting income tax expense - Answer- Accounting income tax expense Which cash flow measures the change in long term assets? - Answer- Cash flow investing Which financial ratios measure "efficiency"? - Answer- Asset turnover and Fixed Asset turnover Which ratio is the best measure of a firm's ability to pay bills? - Answer- Quick ratio Which decision requires using subjective estimates? - Answer- Useful (depreciable) life of a new asset; also timing of revenue and expense recognition What is the yield to maturity of a bond? - Answer- The return earned from purchase date to maturity If a bond pays $50 interest per year and yields 4%, what is its price? - Answer- Premium price; i.e. $50 interest = 5% coupon; if CouponYield, premium price If a firm buys a 90-day Treasury bill, where is it carried on the balance sheet? - Answer- Current asset Why is Gordon Growth model better than CAPM? - Answer- Gordon: can solve for price & required CAPM: solve only for the required return Why is CAPM better than Gordon Growth model? - Answer- CAPM uses actual market data; Gordon just assumes a required return How does a "prudent investor" select investments? - Answer- Seeks the highest return for "reasona