D076 Question and Answer Rated A+

0 / 1 Maria and Mateo are setting financial goals. They decide that they need to save $200 each month to reach their goal of taking their children to visit their grandparents in Spain next summer. What is the objective of setting such a goal? - To maximize individual utility - While everyone has different personal financial goals, the objectives of such goals is to maximize individual utility. 0 / 1 You are analyzing fixed assets to create pro forma financial statements for your company. You realize that, since sales will increase next year, you will also need your manufacturing capacity to increase by the same amount. Currently, you are operating at maximum capacity. You buy an entire new factory and multiple pieces of equipment that increase capacity to much more than you need to meet the sales growth. Which concept describes why such a large purchase was necessary? - Fixed assets are lumpy. - You cannot purchase only part of a factory and equipment to meet the sales growth. Instead, you must purchase the entire factory along with all the equipment to meet the sales growth. We call the increase of fixed assets as the firm approaches its full capacity "lumpy assets" because it requires a lump sum purchase. 1 / 1 Omar is about to purchase a new car for $30,000. He knows he wants to buy the car, but he is still trying to decide how to pay for it. He has barely over $30,000 in his bank account. He can either take out an auto loan from a bank or use a mix of cash and an auto loan. - Financing a goal - He has already made a decision to purchase the car and is now deciding on financing options. 1 / 1 The company Betsy's Wigs is considering three potential projects that are not mutually exclusive. The IRR, NPV, and PI for each project are listed in the table below. Use this information to rank the projects in the order in which Betsy's Wigs should accept them to bring the most value to the firm. Project Project 1 Project 2 Project 3 IRR 23% 18% 21% NPV $820 $880 $790 PI 1.02 1.27 1.35 - Project 3, Project 2, Project 1 - The projects with the highest PIs should be accepted first. 1 / 1 Which type of financial institution is a mutual fund? - Investment institution - Investment institutions provide individuals and firms access to financial markets. A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the industry benchmark. To achieve this goal, costs were cut in production through an investment in efficient equipment, and the company achieved a higher profit margin. If this continues, you are certain that the firm will achieve its goal in two years. What is this an example of? - Progress measurement - You are comparing the company's ratio to the goal and checking how the company is progressing toward the goal. A company is considering five projects that are not mutually exclusive. However, the company does not have enough money to do all of them. In order to prioritize projects that fit within the company's budget, which capital budgeting method should be used? - Profitability index (PI) A company is trying to decide which of four projects to invest in. Project 1 has an IRR of 14% and an NPV of $54,000. Project 2 has an IRR of 11% and an NPV of $67,000. Project 3 has an IRR of 9% and an NPV of $60,000. Project 4 has an IRR of 13% and an NPV of $47,000. If the company can do only one project, which project should it choose to add the greatest value to the firm? - Project 2 -The project with the highest NPV will bring the most value to the company. A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? - Set a strict covenant that the company cannot easily achieve. - By setting a strict covenant, there is a risk that the company may not meet its obligation, which would deter the company from taking on risky projects. A company that produces soap, shampoo, lotion, and other personal care products has recently taken a hit due to a competitor's new product line. The company decides to reduce wages for its labor force to save money while the company focuses on building up its reputation again, but the company's labor force goes on strike to protest the pay cuts. What type of risk does the strike represent? - Idiosyncratic risk - Idiosyncratic risk is the same as firm-specific risk. Since the strike will most likely affect only this firm, it is a firm-specific risk. A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? - Agency problem due to conflicting interests - Accounting manipulation by management in pursuit of higher stock-related compensation is an example of an agency problem. A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment using a method that considers the time value of money. Is there more than one way to do this? - Yes, the analyst could use both the NPV and the IRR. - Both NPV and IRR take into account the time value of money. A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net present value is $5,000. Given this information, which statement is correct? - The project should be accepted because it has a positive NPV. - Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a $600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent $2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in the company's capital budgeting decision? - 3,000,000 for the offer price of the land - If you do the project, you will miss the opportunity to sell the land for $3,000,000. This is an example of an opportunity cost. Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company's leadership the fastest that ABC can grow? - Sustainable growth rate -Sustainable growth rate is defined as the rate at which a firm can grow without issuing new equity. It implies that the firm's growth comes from the return on equity less any dividends. Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? - Tighten the credit standards for its customers. - The credit standards are too loose, so the customers are not paying Firm A as quickly as they are paying other competitors in the industry. Tightening the credit standards would shorten the average collection period. For what purpose are market ratios used? - To evaluate the current share price of a public firm's stock - Market ratios are used to evaluate whether the current share of a public firm's stock is correctly priced.