MBA Prep CFIN Fundamentals of Economics questions with correct

MBA Prep CFIN Fundamentals of Economics questions with correct answers Analysts within a company are more likely to fall into the "false accuracy trap" when they develop pro formas than would external analysts because insiders have access to more detailed information - ✔✔ ANSW✔✔ True When making financial projections, if a particular expense item cannot be predicted with any degree of confidence, it should be forecast at the highest level it wou ld ever likely to reach, so as to make the pro formas conservative - ✔✔ ANSW✔✔ False The greater detail in a pro forma, the greater its accuracy will be - ✔✔ ANSW✔✔ False The qualitative portion of a financial analysis is analogous to the hypothesis -forming state of scientific investigation because - ✔✔ ANSW✔✔ assumptions not tested till numbers are run, false assumption may be formed, empirical measurement performed later During the qualitative portion of developing pro formas, - ✔✔ ANSW✔✔ industry -wide conside rations may be less important than company -specific issues An assumption is critical if - ✔✔ ANSW✔✔ it affections the bottom line greater than other assumptions, it reflects a judgement about the firm's ability to perform one of the keys to success Horizon tal and vertical percentage trends are useful in projecting future financial statements - ✔✔ ANSW✔✔ True In a stable, predictable industry, an average of the precious ten years' sales growth figures probably provides a more accurate forecast than assuming t he same level of sales next year as in the current year. - ✔✔ ANSW✔✔ True When performing sensitivity analysis - ✔✔ ANSW✔✔ statistical methods can be usefully employed, electronic spreadsheets can save time, assumptions should be changed one at a time The fi nal step in using pro formas is to - ✔✔ ANSW✔✔ Compare the results of the sensitivity analysis to the decision -maker's tolerance in the current situation The most accurate pro formas contain the most detail - ✔✔ ANSW✔✔ false In projecting an income statement based on a balance sheet, which of the following categories would you contend to be least likely to vary directly with a change in sales? - ✔✔ ANSW✔✔ Depreciation Hypothesis that are formed during the qualitative analysis can be verified when the analyst r eviews the firm's historical performance - ✔✔ ANSW✔✔ True Statistical methods can be employed to - ✔✔ ANSW✔✔ smooth out historical performance trends, aid the analyst in making estimates of future performance, establish boundaries for sensitivity analysis Sensitivity analysis should not be performed - ✔✔ ANSW✔✔ on a predictable, immaterial item If projected assets exceed liabilities and OE, it is assumed that the difference is funded through excess cash - ✔✔ ANSW✔✔ False What is the most compelling reason to project a firm's income statement before projecting its balance sheet? - ✔✔ ANSW✔✔ The change in retained earnings is determined by net income and dividend payments, working capital account balances are affected by sales levels When doing a comprehensive fi nancial forecast, which account warrants the most thorough relational and trend analysis? - ✔✔ ANSW✔✔ Sales The most significant difference between projecting balance sheets and projecting cash flow is that - ✔✔ ANSW✔✔ The cash flow statement shows the period ic increase or decrease in the plug figure Companies are concerned about shareholders' interests because - ✔✔ ANSW✔✔ firms like high share value, shareholders own the firm As long as owners perceive that managers are creating value in the firm, they are li kely to hold on to their shares - ✔✔ ANSW✔✔ True Value is created in a firm through - ✔✔ ANSW✔✔ Asset acquisition, which improve earnings or efficiencies, capitalization decisions, the reduction of operational and financial risks A firm's dividend policy can usually be established independently of its growth plans - ✔✔ ANSW✔✔ False Dividends are the sole source of returns for shareholders - ✔✔ ANSW✔✔ false It is likely that - ✔✔ ANSW✔✔ prudent managers have a detailed knowledge of the composition of their shareho lders and mixing asset purchase and financing decisions could cause managers to make poor decisions Financial risk - ✔✔ ANSW✔✔ is related to the amount of debit in a firm's capitalization Financial leverage raises a share's market value until - ✔✔ ANSW✔✔ financial risks outweighs the benefits