C214 Financial Management Overview Concept Quiz Answers 2023

1. The goal of the corporation is to: a. Maximize profits b. Maximize market share c. Maximize stock price d. Minimize risk - Correct answer-c. Maximize stock price 2. Risk premium is best described as a. Return on risky securities b. Compensation for risk-taking c. Return on stocks d. Expected return on securities - Correct answer-b. Compensation for risk-taking 3. What is the relationship between risk and required return? a. The two are independent b. Higher required return causes lower risk c. Higher risk causes higher required return d. None of the above - Correct answer-c. Higher risk causes higher required return 4. The value of money depends upon a. The timing of the receipt b. The certainty of receipt c. The size of the receipt d. All of the above - Correct answer-d. All of the above 5. What is the purpose of the SEC 10-K filing requirement? a. Promote transparency and efficiency b. Prevent insider trading c. Regulate sales practices d. Prevent monopolies - Correct answer-a. Promote transparency and efficiency 6. Which line item is not part of net working capital? a. Inventory b. Bonds c. Accounts Payable d. Accrued expenses - Correct answer-b. Bonds 7. Which action causes a cash outflow? a. Increase in accounts payable b. Decrease in accounts receivable c. Increase in inventory d. None of the above - Correct answer-c. Increase in inventory 8. Which of the following is correct? a. Gross PPE equals Net PPE plus depreciation expense b. Gross PPE equals Net PPE plus accumulated depreciation c. Net PPE equals Gross PPE plus depreciation expense d. None of the above - Correct answer-c. Net PPE equals Gross PPE plus depreciation expense 9. Net Margin is defined as: a. Net Income divided by sales b. EBIT divided by sales c. Dividends divided by net income d. Retained earnings divided by sales. - Correct answer-a. Net Income divided by sales 10. Which item is added to the balance sheet? a. Depreciation expense b. Dividends paid c. Addition to retained earnings d. Both a and c - Correct answer-d. Both a and c 11. What item is added to net income to calculate net cash flow? a. Taxes b. Depreciation expense c. Dividends paid d. None of the above - Correct answer-b. Depreciation expense 12. Which represents cash earned by producing and selling the product a. Cash flow operations b. Cash flow financing c. Cash flow investing d. None of the above - Correct answer-a. Cash flow operations 13. Which ratio reflects a firm's reliance on debt financing? a. Quick ratio b. Net Margin c. Financial leverage d. Asset turnover - Correct answer-c. Financial leverage 14. If two firms use different inventory valuation methods, it is called: a. Timing issue b. Seasonal effect c. Cross industry effect d. Accounting difference - Correct answer-d. Accounting difference 15. What affects the required return on a security? a. Perceived riskiness of the security b. Degree of investor risk aversion c. Trading in financial markets d. All of the above - Correct answer-d. All of the above 16. Which is the most frequent type of transaction in financial markets? a. IPO's b. Secondary market trades c. Primary market trades d. Venture capitalist trades - Correct answer-b. Secondary market trades 17. Which of the 5 white financial function keys represents a series of cash disbursements? a. N b. PV c. I/Y d. PMT - Correct answer-d. PMT 18. If payments are made semi-annually, which key inputs must be adjusted? a. PMT b. I/Y c. N d. All of the above - Correct answer-d. All of the above 19. Which can be defined as "change in value of cash over time"? a. Interest rate b. Yield c. Expected return d. All of the above - Correct answer-d. All of the above 20. Which signifies a need to change the calculator to Begin mode? a. Cash deposited at the beginning of the year b. Recurring payments made at the beginning of each year c. Payments are made more frequently than annually d. None of the above - Correct answer-b. Recurring payments made at the beginning of each year 21. Why is an annuity due more valuable than an ordinary annuity? a. Payments are received earlier b. Interest is compounded c. It is not more valuable; they are the same d. Use different interest rates. - Correct answer-a. Payments are received earlier 23. Which annuity provides increasing payments over time? a. Annuity Due b. Ordinary Annuity c. Perpetual Annuity d. Perpetual Growth Annuity - Correct answer-d. Perpetual Growth Annuity 24. What causes uncertainty in financial decisions? a. GAAP changes b. Erroneous future projections c. Computer error d. Both b and c - Correct answer-b. Erroneous future projections 25. An increase in net working causes a. A cash inflow b. A cash outflow c. Does not affect cash flow d. Depends upon accrual accounting - Correct answer-b. A cash outflow 26. What feature distinguishes bonds from stock? a. Price determined in market trading b. Required cash payments to investors c. Mandatory redemption date d. Both b and c - Correct answer-d. Both b and c 27. Which bond feature is not a legal obligation? a. Face value b. Price c. Maturity Date d. Coupon Rate - Correct answer-b. Price 28. Yield on a bond can best be described as: a. Interest received by the investor b. The coupon rate c. Rate of increase in value of investment d. Cash return to the investor - Correct answer-c. Rate of increase in value of investment 29. When is the bond yield equal to the coupon rate? a. At premium price b. At par price c. At discount price d. Never - Correct answer-b. At par price 30. For a semi-annual pay bond, which inputs must be adjusted? a. N and I/Y b. N and PMT c. N, I/Y, and PMT d. PV and FV - Correct answer-c. N, I/Y, and PMT 31. Which describes the relationship between price and yield a. Both change in the same direction b. Price increases cause yield decreases c. The two are independent d. Indenture sets yield; trading sets price - Correct answer-b. Price increases cause yield decreases 32. Which does not affect a bond's required yield? a. Treasury yields b. Earnings per share c. Term to maturity d. Firm riskiness - Correct answer-b. Earnings per share 33. A bond's duration causes: a. Default risk b. Market risk c. Credit risk d. Event risk - Correct answer-b. Market risk 34. If a bond's price is at a discount, then a. Bond yield is less that coupon rate b. Bond yield is equal to the coupon rate c. Bond yield is more than the coupon rate d. Insufficient information - Correct answer-c. Bond yield is more than the coupon rate 35. What is the difference between common and preferred stock? a. Preferred stock has a maturity date b. Preferred stock dividends are fixed c. Common stock has priority of claims in bankruptcy d. Preferred stock cannot be bought back - Correct answer-b. Preferred stock dividends are fixed 36. If rating agencies downgrade a bond from AAA to BBB, what happens? a. The bond's price decreases b. Firm must re-purchase the bond c. The firm reduces the bond value on its balance sheet d. Both a and c - Correct answer-a. The bond's price decreases 37. What are the two sources of profit to a stock investor? a. Dividends and redemption at maturity b. Dividends and capital gains c. Coupon payments and capital gains d. Interest and dividends - Correct answer-b. Dividends and capital gains 38. Which best describes the "market risk premium"? a. Expected return on stocks b. Required return on stock c. Excess return over risk free rate d. Beta - Correct answer-c. Excess return over risk free rate 39. What best describes Beta? a. A measure of financial leverage b. The market risk premium c. Relative riskiness of a stock d. Measure of stock's required return - Correct answer-c. Relative riskiness of a stock 40. Which is not a means of eliminating idiosyncratic risk? a. A diversified portfolio b. Hold a portfolio with a Beta = 1.0 c. Buy a low beta stock d. Hold a portfolio of high beta stocks - Correct answer-c. Buy a low beta stock 41. The required return on stocks is derived from: a. Idiosyncratic risk b. Systematic risk c. Total risk d. Size of the portfolio - Correct answer-b. Systematic risk 42. A prudent investor would seek a. The lowest risk possible b. The highest return possible c. An appropriate risk exposure d. Minimize the return-to-risk ratio - Correct answer-c. An appropriate risk exposure 43. A stock whose return is affected substantially by a recession is: a. Low beta stock b. High beta stock c. Low PE stock d. High PE stock - Correct answer-b. High beta stock 44. Which factor does not affect WACC a. Firm risk exposure b. Treasury yields c. Tax Rate d. Efficiency ratio - Correct answer-d. Efficiency ratio 45. Which factor does not impact a stock's price? a. Risk free rate b. Expected dividend growth rate c. Beta d. Maturity Date - Correct answer-d. Maturity Date 46. Portfolios on the efficient frontier: a. Maximize the return-to-risk ratio b. Reflect prudent investor risk-taking c. Eliminate systematic risk d. Both a and b - Correct answer-a. Maximize the return-to-risk ratio 47. A firm is a good investment if a. Its PE is low b. Its price is less than intrinsic value c. It ROE is high d. It has a great product - Correct answer-b. Its price is less than intrinsic value 48. Why does a firm calculate WACC? a. It is needed to calculate net income b. It is the cost of financing the firm c. Required input on SEC 10-K report d. Required by GAAP - Correct answer-b. It is the cost of financing the firm 49. Which rule best described investor behavior? a. Maximize expected return b. Minimize risk c. Maximize the return-to-risk ratio d. Minimize the return-to-risk ratio - Correct answer-c. Maximize the return-to-risk ratio 50. A firm's stock price depends upon a. Its current earnings per share b. Its current dividend rate c. Expected dividends in the future d. Its S&P rating - Correct answer-c. Expected dividends in the future 51. Which measures sales growth that can be financed internally? a. DFN b. CFO c. SGR d. DFN - Correct answer-c. SGR 52. Why are accurate sales forecast desirable? a. To plan resource acquisition b. To calculate price c. To reduce working capital d. Requirement for 10-K report - Correct answer-a. To plan resource acquisition 53. What components of ICF are included in Gross PPE a. Cost of asset b. Shipping & installation expense c. Increase in Net Working Capital d. Both a and b - Correct answer-d. Both a and b 54. If an equipment salvage value is greater than book value, a. There is a tax cash refund b. There is a tax cash outflow c. Taxes are not affected d. Depends on the NWC recapture - Correct answer-b. There is a tax cash outflow 55. A potential project should be adopted if a. IRR is less than WACC b. NPV is positive using the required return on bonds as the discount rate c. IRR is greater than WACC d. IRR equals WACC and NPV is positive - Correct answer-c. IRR is greater than WACC 56. A firm will have volatile profits if a. It has high operating leverage b. It has high financial leverage c. It has high combined leverage d. All of the above - Correct answer-d. All of the above 57. Firms with high leverage a. Have lower net income b. Have more volatile profits c. Have higher required returns d. Both b and c - Correct answer-d. Both b and c 58. Excessive leverage will likely result in a. Increased WACC b. Reduced stock price c. Reduced profits d. Both a and b - Correct answer-b. Reduced stock price 59. Why might a firm buy back stock a. Increase financial leverage b. Reduce financial leverage c. Reduce operating leverage d. Increase operating leverage - Correct answer-a. Increase financial leverage 60. A bond's market risk is measured by a. S&P rating b. Duration c. Beta d. Both a and c - Correct answer-b. Duration