D775 Exam Review Questions with Correct
Answers
Accounts Receivable (A/R) Turnover
A type of liquidity ratio that describes the number of times a firm's accounts receivable
account is paid off. Accounts Receivable Turnover = Credit Sales ÷ Accounts Receivable.
Activity Ratios
A type of financial ratio that evaluates how efficiently a firm utilizes its assets to generate
sales or revenue; also known as efficiency ratios.
After-tax Cost of Debt
An adjustment of the before-tax cost of debt that considers the tax deductions on interest
expenses. It reflects the actual cost to a firm for debt financing after benefiting from tax
breaks.
Agency Costs
Costs that are incurred by the firm when management and employees of a company do not act
in the best interests of shareholders.
Agency Problem
A conflict of interest inherent in relationships where one party is expected to act in another's
best interests, such as between shareholders and company management.
Annual Interest Rate
The annualized cost of borrowing or the yearly interest rate charged on a loan or credit
balance. Also known as annual percentage rate (APR).
,Annuity
A financial arrangement in which a series of equal payments is made or received at regular
intervals over a specified period of time.
Assets
Resources owned by the company that have economic value.
Auction Markets
Financial markets in which buyers and sellers submit competitive bids and offers, with
transactions occurring at prices that match the highest bid with the lowest offer.
Average Collection Period
A type of liquidity ratio that calculates the average number of days it takes for a company to
collect its receivables. Average Collection Period = Accounts Receivable ÷ Daily Credit
Sales.
Balance Sheet
A financial statement that presents a company's financial position at a specific point in time.
Before-tax Cost of Debt
The interest rate on loans or bonds. If a bank provides an interest rate on a small business
loan of 9.5%, then 9.5% is the before-tax cost of debt.
Board of Directors (BOD)
A group of individuals elected by a company's shareholders to oversee the management and
make key decisions on corporate policies and strategy.
Bonds
, Debt securities issued by corporations or governments to raise capital, where the issuer agrees
to pay back the principal along with interest on specified dates.
Book Value
Literal value or face value.
Business Finance
The area of the business in which 1) financial measures are used to help management make
decisions (ratio analysis), 2) financial analysts use mathematical models to select what
projects to invest in (capital budgeting), and 3) financial analysts use the cost of capital to
determine whether these projects should be financed with either debt or equity, and which
type of each.
Capital Appreciation
When a stock is bought at a lower price than what it is sold. Subtracting the lower purchase
price from the higher sales price is the appreciation.
Capital Budgeting
The process by which businesses evaluate potential investments to determine if they are
worth pursuing. It assesses projected cash flows, costs, and returns of projects like new
machinery or acquisitions to ensure efficient resource allocation and profitability.
Capital Structure
The mixture of debt and equity that a firm uses to finance the company.
Cash Ratio
A type of liquidity ratio that provides insight into a company's ability to pay off short-term
liabilities with its cash on hand. Cash Ratio = Cash ÷ Current Liabilities.
Answers
Accounts Receivable (A/R) Turnover
A type of liquidity ratio that describes the number of times a firm's accounts receivable
account is paid off. Accounts Receivable Turnover = Credit Sales ÷ Accounts Receivable.
Activity Ratios
A type of financial ratio that evaluates how efficiently a firm utilizes its assets to generate
sales or revenue; also known as efficiency ratios.
After-tax Cost of Debt
An adjustment of the before-tax cost of debt that considers the tax deductions on interest
expenses. It reflects the actual cost to a firm for debt financing after benefiting from tax
breaks.
Agency Costs
Costs that are incurred by the firm when management and employees of a company do not act
in the best interests of shareholders.
Agency Problem
A conflict of interest inherent in relationships where one party is expected to act in another's
best interests, such as between shareholders and company management.
Annual Interest Rate
The annualized cost of borrowing or the yearly interest rate charged on a loan or credit
balance. Also known as annual percentage rate (APR).
,Annuity
A financial arrangement in which a series of equal payments is made or received at regular
intervals over a specified period of time.
Assets
Resources owned by the company that have economic value.
Auction Markets
Financial markets in which buyers and sellers submit competitive bids and offers, with
transactions occurring at prices that match the highest bid with the lowest offer.
Average Collection Period
A type of liquidity ratio that calculates the average number of days it takes for a company to
collect its receivables. Average Collection Period = Accounts Receivable ÷ Daily Credit
Sales.
Balance Sheet
A financial statement that presents a company's financial position at a specific point in time.
Before-tax Cost of Debt
The interest rate on loans or bonds. If a bank provides an interest rate on a small business
loan of 9.5%, then 9.5% is the before-tax cost of debt.
Board of Directors (BOD)
A group of individuals elected by a company's shareholders to oversee the management and
make key decisions on corporate policies and strategy.
Bonds
, Debt securities issued by corporations or governments to raise capital, where the issuer agrees
to pay back the principal along with interest on specified dates.
Book Value
Literal value or face value.
Business Finance
The area of the business in which 1) financial measures are used to help management make
decisions (ratio analysis), 2) financial analysts use mathematical models to select what
projects to invest in (capital budgeting), and 3) financial analysts use the cost of capital to
determine whether these projects should be financed with either debt or equity, and which
type of each.
Capital Appreciation
When a stock is bought at a lower price than what it is sold. Subtracting the lower purchase
price from the higher sales price is the appreciation.
Capital Budgeting
The process by which businesses evaluate potential investments to determine if they are
worth pursuing. It assesses projected cash flows, costs, and returns of projects like new
machinery or acquisitions to ensure efficient resource allocation and profitability.
Capital Structure
The mixture of debt and equity that a firm uses to finance the company.
Cash Ratio
A type of liquidity ratio that provides insight into a company's ability to pay off short-term
liabilities with its cash on hand. Cash Ratio = Cash ÷ Current Liabilities.
