WGU D076 |260 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?
Yes, because the IRR exceeds the cost of capital.
No, because the hurdle rate is lower than the IRR.
Yes, because newer models of equipment are always profitable investments.
No, because the old bookbinding machine still works. Ans✓✓✓-Yes, because the
IRR exceeds the cost of capital. When the IRR of a project is greater than the
hurdle rate (the required rate of return, or cost of capital), it indicates that the
company should accept the project.
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?
Trend analysis
Flexibility
Progress measurement
Cross-sectional analysis Ans✓✓✓-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?
,Internal rate of return (IRR)
Net present value (NPR)
Comparing the initial outlay to start with the biggest project
Profitability index (PI) Ans✓✓✓-Profitability index (PI). The PI should be used first
to compare the projects and then to rank them to maximize the value of the firm.
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 has an IRR of 11% and an NPV of
$67,000. 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?
Let the company manipulate accounting procedures.
Let the company take the mortgage loan because of its long partnership with the
bank.
Set a strict covenant that the company cannot easily achieve.
Push the company to pay dividends to the shareholders. Ans✓✓✓-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?
Market risk
Idiosyncratic risk
Non-diversifiable risk
Systematic risk Ans✓✓✓-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 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?
No, the analyst could only use cash budgeting to evaluate the project.
Yes, the analyst could use the current ratio and could compare cost of capital
rates.
Yes, the analyst could use both the NPV and the IRR. Ans✓✓✓-Yes, the analyst
could use both the NPV and the IRR. Both NPV and IRR take into account the time
value of money.
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?
Because the firm paid down $10,000 on a loan
, Because the firm purchased inventory on credit this month
Because the firm did not make all sales on cash
Because the firm paid cash for inventory purchased Ans✓✓✓-Because the firm
did not make all sales on cash! Some sales are made on credit rather than cash,
and a portion of credit sales are collected in the following months after the sales.
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?
Its profitability ratio is decreasing.
Its leverage ratio is decreasing.
Its activity ratio is increasing.
Its liquidity ratio is increasing. Ans✓✓✓-Its liquidity ratio is increasing. Liquidity is
a measure of the ability of a firm to convert short-term assets into cash. Paying off
short-term loans quickly is an indication that a firm is quite liquid, so the firm's
liquidity ratio would be increasing.
A large corporation is looking to merge with another large corporation. Which
financial institution can help them do this?
Central bank
Pension fund
Private equity institution
Investment bank Ans✓✓✓-Investment banks facilitate complex financial deals,
like mergers.
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?
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?
Yes, because the IRR exceeds the cost of capital.
No, because the hurdle rate is lower than the IRR.
Yes, because newer models of equipment are always profitable investments.
No, because the old bookbinding machine still works. Ans✓✓✓-Yes, because the
IRR exceeds the cost of capital. When the IRR of a project is greater than the
hurdle rate (the required rate of return, or cost of capital), it indicates that the
company should accept the project.
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?
Trend analysis
Flexibility
Progress measurement
Cross-sectional analysis Ans✓✓✓-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?
,Internal rate of return (IRR)
Net present value (NPR)
Comparing the initial outlay to start with the biggest project
Profitability index (PI) Ans✓✓✓-Profitability index (PI). The PI should be used first
to compare the projects and then to rank them to maximize the value of the firm.
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 has an IRR of 11% and an NPV of
$67,000. 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?
Let the company manipulate accounting procedures.
Let the company take the mortgage loan because of its long partnership with the
bank.
Set a strict covenant that the company cannot easily achieve.
Push the company to pay dividends to the shareholders. Ans✓✓✓-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?
Market risk
Idiosyncratic risk
Non-diversifiable risk
Systematic risk Ans✓✓✓-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 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?
No, the analyst could only use cash budgeting to evaluate the project.
Yes, the analyst could use the current ratio and could compare cost of capital
rates.
Yes, the analyst could use both the NPV and the IRR. Ans✓✓✓-Yes, the analyst
could use both the NPV and the IRR. Both NPV and IRR take into account the time
value of money.
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?
Because the firm paid down $10,000 on a loan
, Because the firm purchased inventory on credit this month
Because the firm did not make all sales on cash
Because the firm paid cash for inventory purchased Ans✓✓✓-Because the firm
did not make all sales on cash! Some sales are made on credit rather than cash,
and a portion of credit sales are collected in the following months after the sales.
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?
Its profitability ratio is decreasing.
Its leverage ratio is decreasing.
Its activity ratio is increasing.
Its liquidity ratio is increasing. Ans✓✓✓-Its liquidity ratio is increasing. Liquidity is
a measure of the ability of a firm to convert short-term assets into cash. Paying off
short-term loans quickly is an indication that a firm is quite liquid, so the firm's
liquidity ratio would be increasing.
A large corporation is looking to merge with another large corporation. Which
financial institution can help them do this?
Central bank
Pension fund
Private equity institution
Investment bank Ans✓✓✓-Investment banks facilitate complex financial deals,
like mergers.
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?
