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FINANCE SKILLS FOR MANAGERS -
D076 OFFICIAL EXAM QUESTIONS
WITH ANSWERS.
1. Jerry wants to begin budgeting his money. What are three
principles that he should know before beginning the budgeting
process? - correct answer -Keep records, understand the key
areas of savings, expenses and income; and eliminate
consumer debt.
2. What are the three things one must determine before making a
personal budget? - correct answer -Income, expenses, and
savings
3. A firm had sales of $100,000 this month. However, the firm
received only $90,000 in cash from sales. Why would the firm
receive $10,000 less cash than its monthly sales? - correct
answer -Because the firm did not make all sales on cash
4. What three things should an individual or company be doing so
that their budget is effective and so that they are on track to
meet their financial goals? - correct answer -Track cash flows,
monitor cash flows, and revise the budget
, Page | 2
5. What is the envelope method of budgeting? - correct answer -
Withdrawing cash at the beginning of the period and then
allowing only a certain amount to be available for each
category of spending
6. What are long-term financial forecasts used for? - correct
answer -Making investment and financing decisions
7. Which type of account does not vary with sales and is left to
management's discretion? - correct answer -Non-Spontaneous
accounts (also called discretionary accounts)
8. What is the rate at which a firm can grow without issuing new
equity? - correct answer -Sustainable growth rate
9. Why do fixed assets increase as a lump sum instead of in
proportion to sales growth? - correct answer -A firm must
purchase an entire fixed asset rather than just the portion
needed to increase production (a piece of machinery)
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10. What indicates to a firm that a project will increase
shareholder wealth? - correct answer -The NPV is positive.
11. What part of the NPV calculation is very important but
difficult to estimate? - correct answer -The cost of capital
12. What is an advantage of using the NPV method? - correct
answer -It calculates the dollar value that would be added to
the firm by doing the project.
13. What is a disadvantage of using the NPV method? - correct
answer -It is not an effective way to compare projects of
different sizes.
14. Suppose Alice is trying to explain to her friend, who knows
nothing about the time value of money, why she should invest
in Alice's new company. Which method of valuation should
Alice use to convince her friend to invest? - correct answer -
Internal rate of return (IRR)
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15. Which NPV value indicates that the IRR has been reached?
- correct answer -0.00 The IRR is the rate of return that makes
the NPV of a project equal to zero.
16. Why is the IRR a poor valuation method for a project with
unconventional cash flows? - correct answer -There are
multiple sign changes in the calculation resulting in multiple
IRRs, and it is impossible to tell which IRR is the correct one.
17. A company called Bobby's Books is considering purchasing
a new bookbinding machine. The company calculates the
hurdle rate of the project to be 9% and the IRR to be 11%.
Should the company purchase the bookbinding machine? -
correct answer -Yes, because the IRR exceeds the cost of
capital.
18. Which capital investment evaluation method is presented as
a ratio? - correct answer -Profitability index (PI)
19. How does the PI aid in interpretation of the NPV? - correct
answer -It gives an idea of the return generated by a project.
FINANCE SKILLS FOR MANAGERS -
D076 OFFICIAL EXAM QUESTIONS
WITH ANSWERS.
1. Jerry wants to begin budgeting his money. What are three
principles that he should know before beginning the budgeting
process? - correct answer -Keep records, understand the key
areas of savings, expenses and income; and eliminate
consumer debt.
2. What are the three things one must determine before making a
personal budget? - correct answer -Income, expenses, and
savings
3. A firm had sales of $100,000 this month. However, the firm
received only $90,000 in cash from sales. Why would the firm
receive $10,000 less cash than its monthly sales? - correct
answer -Because the firm did not make all sales on cash
4. What three things should an individual or company be doing so
that their budget is effective and so that they are on track to
meet their financial goals? - correct answer -Track cash flows,
monitor cash flows, and revise the budget
, Page | 2
5. What is the envelope method of budgeting? - correct answer -
Withdrawing cash at the beginning of the period and then
allowing only a certain amount to be available for each
category of spending
6. What are long-term financial forecasts used for? - correct
answer -Making investment and financing decisions
7. Which type of account does not vary with sales and is left to
management's discretion? - correct answer -Non-Spontaneous
accounts (also called discretionary accounts)
8. What is the rate at which a firm can grow without issuing new
equity? - correct answer -Sustainable growth rate
9. Why do fixed assets increase as a lump sum instead of in
proportion to sales growth? - correct answer -A firm must
purchase an entire fixed asset rather than just the portion
needed to increase production (a piece of machinery)
, Page | 3
10. What indicates to a firm that a project will increase
shareholder wealth? - correct answer -The NPV is positive.
11. What part of the NPV calculation is very important but
difficult to estimate? - correct answer -The cost of capital
12. What is an advantage of using the NPV method? - correct
answer -It calculates the dollar value that would be added to
the firm by doing the project.
13. What is a disadvantage of using the NPV method? - correct
answer -It is not an effective way to compare projects of
different sizes.
14. Suppose Alice is trying to explain to her friend, who knows
nothing about the time value of money, why she should invest
in Alice's new company. Which method of valuation should
Alice use to convince her friend to invest? - correct answer -
Internal rate of return (IRR)
, Page | 4
15. Which NPV value indicates that the IRR has been reached?
- correct answer -0.00 The IRR is the rate of return that makes
the NPV of a project equal to zero.
16. Why is the IRR a poor valuation method for a project with
unconventional cash flows? - correct answer -There are
multiple sign changes in the calculation resulting in multiple
IRRs, and it is impossible to tell which IRR is the correct one.
17. A company called Bobby's Books is considering purchasing
a new bookbinding machine. The company calculates the
hurdle rate of the project to be 9% and the IRR to be 11%.
Should the company purchase the bookbinding machine? -
correct answer -Yes, because the IRR exceeds the cost of
capital.
18. Which capital investment evaluation method is presented as
a ratio? - correct answer -Profitability index (PI)
19. How does the PI aid in interpretation of the NPV? - correct
answer -It gives an idea of the return generated by a project.
