D076 Study Guide
A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and
weaknesses in cash flows and its budgeting process.
Which major use of cash budgeting is this an example of?
Standardization
Assessment of future needs
Performance evaluation
Corrective action - ✔✔Performance evaluation
A company is developing a financial forecast for the next year. The company plans to implement a new
factory that will increase production and resulting sales by 20%.
Since the company's assets are increasing significantly, what else must increase?
Financing
Accounts receivable turnover
Profit turnover
Gross margin - ✔✔Financing
A financial manager at a company is trying to determine whether to issue new stocks or new bonds to
cover the costs of a project the company is doing the next year.
Which main task in business finance is this situation an example of?
,Managing working capital
Making investment decisions
Managing interdepartmental loans
Making financing decisions - ✔✔Making financing decisions
A firm is currently operating at 75% capacity with current sales of $34 million.
Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million
next year?
No, because the increase in sales will not exceed the firm's sales capacity.
Yes, because the increase in sales will exceed the firm's sales capacity.
Yes, because the increase in sales will not exceed the firm's sales capacity.
No, because the increase in sales will exceed the firm's sales capacity. - ✔✔No, because the increase in
sales will not exceed the firm's sales capacity.
A pharmaceutical company recently spent $2 million developing a new drug. The company then
conducts capital budgeting analysis to determine if it should produce the newly developed drug. The net
present value (NPV) of the project is $1.5 million.
Why should this company produce the drug?
Because the NPV is greater than zero
Because the losses due to cannibalization are less than the value of the project
Because the development costs are greater than the value of the project
Because the project will provide a total value of $3.5 million to the company - ✔✔Because the NPV is
greater than zero
, A sign company is planning to have an initial public offering (IPO). In which type of market will its stock
first be sold to the public?
Primary market
Money market
Efficient market
Secondary market - ✔✔Primary market
An employee was recently hired as a financial analyst and asked to create a cash budget for the
employee's division for the next year.
Which component should the employee exclude from the budget?
Purchase of inventory for sales that the employee will make this year
Payment toward the line of credit that is due next month
Payments to suppliers that will be made over the next six months
Purchase of equipment that will be bought in three years - ✔✔Purchase of equipment that will be
bought in three years
An energy company discovers that a new bill has been proposed to change the amount of fuel that can
be exported outside the country. If passed, this could have a serious negative effect on the company's
revenues. Some of the company's competitors are obtaining insurance policies to compensate for this
risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do
nothing—ultimately taking responsibility for this particular risk instead of trying to transfer the risk
through an insurance policy.
Which risk management technique is this choice an example of?
A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and
weaknesses in cash flows and its budgeting process.
Which major use of cash budgeting is this an example of?
Standardization
Assessment of future needs
Performance evaluation
Corrective action - ✔✔Performance evaluation
A company is developing a financial forecast for the next year. The company plans to implement a new
factory that will increase production and resulting sales by 20%.
Since the company's assets are increasing significantly, what else must increase?
Financing
Accounts receivable turnover
Profit turnover
Gross margin - ✔✔Financing
A financial manager at a company is trying to determine whether to issue new stocks or new bonds to
cover the costs of a project the company is doing the next year.
Which main task in business finance is this situation an example of?
,Managing working capital
Making investment decisions
Managing interdepartmental loans
Making financing decisions - ✔✔Making financing decisions
A firm is currently operating at 75% capacity with current sales of $34 million.
Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million
next year?
No, because the increase in sales will not exceed the firm's sales capacity.
Yes, because the increase in sales will exceed the firm's sales capacity.
Yes, because the increase in sales will not exceed the firm's sales capacity.
No, because the increase in sales will exceed the firm's sales capacity. - ✔✔No, because the increase in
sales will not exceed the firm's sales capacity.
A pharmaceutical company recently spent $2 million developing a new drug. The company then
conducts capital budgeting analysis to determine if it should produce the newly developed drug. The net
present value (NPV) of the project is $1.5 million.
Why should this company produce the drug?
Because the NPV is greater than zero
Because the losses due to cannibalization are less than the value of the project
Because the development costs are greater than the value of the project
Because the project will provide a total value of $3.5 million to the company - ✔✔Because the NPV is
greater than zero
, A sign company is planning to have an initial public offering (IPO). In which type of market will its stock
first be sold to the public?
Primary market
Money market
Efficient market
Secondary market - ✔✔Primary market
An employee was recently hired as a financial analyst and asked to create a cash budget for the
employee's division for the next year.
Which component should the employee exclude from the budget?
Purchase of inventory for sales that the employee will make this year
Payment toward the line of credit that is due next month
Payments to suppliers that will be made over the next six months
Purchase of equipment that will be bought in three years - ✔✔Purchase of equipment that will be
bought in three years
An energy company discovers that a new bill has been proposed to change the amount of fuel that can
be exported outside the country. If passed, this could have a serious negative effect on the company's
revenues. Some of the company's competitors are obtaining insurance policies to compensate for this
risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do
nothing—ultimately taking responsibility for this particular risk instead of trying to transfer the risk
through an insurance policy.
Which risk management technique is this choice an example of?
