Finance Skills for Managers - D076 |459 questions with
verified answers
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?
Ans✓✓✓-Yes, because the IRR exceeds the cost of capital.
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? Ans✓✓✓-Progress
measurement
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? Ans✓✓✓-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? Ans✓✓✓-Project 2
,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? Ans✓✓✓-Set
a strict covenant that the company cannot easily achieve.
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? Ans✓✓✓-Idiosyncratic 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?
Ans✓✓✓-Agency problem due to conflicting interests
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? Ans✓✓✓-Yes, the analyst could use both
the NPV and the IRR.
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? Ans✓✓✓-Because the firm did not make all sales on cash
,A firm has paid off its short-term loans more quickly in the past couple of years.
What might this trend indicate about the firm's financial ratios? Ans✓✓✓-Its
liquidity ratio is increasing.
A large corporation is looking to merge with another large corporation. Which
financial institution can help them do this? Ans✓✓✓-Investment bank
A local start-up company just hit its five-year anniversary and is planning an initial
public offering sometime this year. In order to issue public stock, which market
will the company use? Ans✓✓✓-Primary market
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? Ans✓✓✓-The project should be accepted because it has a
positive NPV.
About a year ago, the short-term Treasury bill had 1.54% interest and the long-
term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an
interest rate of 3.13%, while the 10-year Treasury note has an interest rate of
2.28%. What does this information indicate about the future economy?
Ans✓✓✓-It may indicate an economic downturn.
Accounting Ans✓✓✓-The system of recording, reporting, and summarizing past
financial information and transactions.
Accounts Receivable Turnover (AR Turnover) Ans✓✓✓-An activity ratio found by
credit sales divided by accounts receivable.
, Activity Ratios Ans✓✓✓-A category of ratios that measure how well a company
uses its assets to generate sales or cash, showing the firm's operational efficiency
and profitability.
Additional Funds Needed (AFN) Ans✓✓✓-Another name for discretionary
financing needed or external financing needed. It represents the additional
financing needed given a firm's expectations for future growth.
Affirmative Covenants Ans✓✓✓-A bond covenant that describes things the
company pledges itself to do in order to protect bondholders.
After W&H Inc. has developed a cash budget, what should the company do in the
following months? Ans✓✓✓-It should monitor its actual cash flows and then
revise the cash budget if needed.
Agency Costs Ans✓✓✓-Costs that are incurred when management does not act
in the best interest of shareholders.
Agency Problem Ans✓✓✓-When the agent (the management) does not act in the
best interest of the principal (the owners).
Aggressive Assets Ans✓✓✓-Companies or securities with beta greater than 1.
Alphabet Co. has $50,000 to spend on capital investment projects for the next
year. It will do as many projects as it has cash for. Alphabet Co. calculates the
potential incremental cash flows and costs of the projects as well as the NPV, IRR,
and PI for each project. How should the company decide which projects to invest
in if it wants to maximize the total amount of value created? Ans✓✓✓-It should
choose the projects with the highest PIs until all capital has been used.
verified answers
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?
Ans✓✓✓-Yes, because the IRR exceeds the cost of capital.
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? Ans✓✓✓-Progress
measurement
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? Ans✓✓✓-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? Ans✓✓✓-Project 2
,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? Ans✓✓✓-Set
a strict covenant that the company cannot easily achieve.
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? Ans✓✓✓-Idiosyncratic 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?
Ans✓✓✓-Agency problem due to conflicting interests
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? Ans✓✓✓-Yes, the analyst could use both
the NPV and the IRR.
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? Ans✓✓✓-Because the firm did not make all sales on cash
,A firm has paid off its short-term loans more quickly in the past couple of years.
What might this trend indicate about the firm's financial ratios? Ans✓✓✓-Its
liquidity ratio is increasing.
A large corporation is looking to merge with another large corporation. Which
financial institution can help them do this? Ans✓✓✓-Investment bank
A local start-up company just hit its five-year anniversary and is planning an initial
public offering sometime this year. In order to issue public stock, which market
will the company use? Ans✓✓✓-Primary market
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? Ans✓✓✓-The project should be accepted because it has a
positive NPV.
About a year ago, the short-term Treasury bill had 1.54% interest and the long-
term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an
interest rate of 3.13%, while the 10-year Treasury note has an interest rate of
2.28%. What does this information indicate about the future economy?
Ans✓✓✓-It may indicate an economic downturn.
Accounting Ans✓✓✓-The system of recording, reporting, and summarizing past
financial information and transactions.
Accounts Receivable Turnover (AR Turnover) Ans✓✓✓-An activity ratio found by
credit sales divided by accounts receivable.
, Activity Ratios Ans✓✓✓-A category of ratios that measure how well a company
uses its assets to generate sales or cash, showing the firm's operational efficiency
and profitability.
Additional Funds Needed (AFN) Ans✓✓✓-Another name for discretionary
financing needed or external financing needed. It represents the additional
financing needed given a firm's expectations for future growth.
Affirmative Covenants Ans✓✓✓-A bond covenant that describes things the
company pledges itself to do in order to protect bondholders.
After W&H Inc. has developed a cash budget, what should the company do in the
following months? Ans✓✓✓-It should monitor its actual cash flows and then
revise the cash budget if needed.
Agency Costs Ans✓✓✓-Costs that are incurred when management does not act
in the best interest of shareholders.
Agency Problem Ans✓✓✓-When the agent (the management) does not act in the
best interest of the principal (the owners).
Aggressive Assets Ans✓✓✓-Companies or securities with beta greater than 1.
Alphabet Co. has $50,000 to spend on capital investment projects for the next
year. It will do as many projects as it has cash for. Alphabet Co. calculates the
potential incremental cash flows and costs of the projects as well as the NPV, IRR,
and PI for each project. How should the company decide which projects to invest
in if it wants to maximize the total amount of value created? Ans✓✓✓-It should
choose the projects with the highest PIs until all capital has been used.
