MGMT 200 PURDUE FINAL QUESTIONS AND
ANSWERS
One can obtain a clear picture of a company's liquidity
by referring to its
A. Balance Sheet.
B. Income Statement - Answers - A. Balance Sheet
(liquidity refers to assets / cash, while income statement only deals with revenues,
expenses, and profits)
The advantages of obtaining funds by issuing debt,
rather than issuing additional common stock, include
which of the following?
A. Funds are obtained without surrendering
ownership control.
B. Funds are obtained without surrendering
ownership control, as well as, interest expense
is tax‐deductible.
C. The company's default risk decreases.
D. Interest expense is tax‐deductible. - Answers - B. Funds are obtained without
surrendering ownership control, as well as, interest expense is tax-deductible.
(but mostly the fact that it is done without surrendering ownership of the company)
Banks will charge a very profitable company a higher
interest rate as compared to a company with minimal
income since the high‐income business will be better
able to pay the extra interest cost.
A. True
B. False - Answers - B. Absorutery not
Banks do the opposite; they charge lower interest rates to profitable companies to
attract their business because there is less risk involved with profitable companies.
The lower the debt to equity ratio, the greater the
financial risk the company is taking.
A. True
B. False - Answers - B. Nuh uh
This makes sense because a LOWER debt to equity ratio means (debt/equity) is small
which means debt is small compared to equity, so therefore a LOWER debt to equity
ratio would imply the opposite; the company would be more financially stable.
,Cash flow generally limits the amount of debt a
business can finance.
A. True
B. False - Answers - A. True
Borrowing levels can INCREASE with *stable* and *predictive* cash flows
Think about credit score; the better credit score (more stable and predictive your credit
is) then the higher loans you can take out.
A debt to equity ratio of approximately .34 means that
one‐fourth of the company's assets are financed by
creditors.
A. True
B. False - Answers - A. Thomas the tank engine says tru tru
indicates creditors are financing 25%
of the company's assets
.34 is approximately .33 or 1/3
This means you have "1" debt for every "3" equity so for example:
Asset (200) = Debt (50) + Equity (150)
Debt/equity = 1/3
A callable bond allows the *holder* to repay the bonds
before their scheduled maturity date at a specified call
price.
A. True
B. False - Answers - B. Mmmmm no, not quite
Holder means the person who issued the bond while *borrower* means the person who
bought the bond. Callable bonds allow the person who HAS the bond to cash it in early.
Convertible bonds allow the borrower to convert each
bond into a specified number of shares of common
stock
A. True
B. False - Answers - B. B as in Bee as in Bfalse
Convertible bonds allow the bond HOLDER (the person who issued the bond) to
convert each bond into common stock.
, This makes sense as only the company has the right to issue common stock
The term used for bonds that are unsecured as
to principal is
A. series bonds.
B. indenture bonds.
C. debenture bonds.
D.callable bonds. - Answers - C. Debenture bonds
Unsecured Bond definition: Bonds (*debentures*) are not backed by collateral
The amount at a present time that is equivalent to a
series of payments and interest in the future.
A. Present value of a single amount
B. Future value of a single amount
C. Present value of an annuity
D. Future value of an annuity - Answers - C. Present value of an annuity
This is basically a fancy way of saying the *price* of an annuity, since all an annuity is is
a series of payments in the future.
The price is also known as the *present value of the future cash flows*
What measurement should be used when reporting
long‐term liabilities on a balance sheet?
A. Present value of the present outflow
B. Present value of the future outflow
C. Future value of the present outflow
D. Future value of the future outflow - Answers - B. Present value of the future outflow
This is basically saying the *price* of the long term liability is to recorded on the balance
sheet, as the *price* of something is just the *present value of the future cash flows*
The price of a bond is equal to:
A. The present value of the interest only
B. The future value of the face amount only
C. The future value of the face amount plus the
future value of the stated interest payments
D. The present value of the face amount plus the
present value of the stated interest payments - Answers - D. The present value of the
face amount plus the
present value of the stated interest payments
You can think of this on a timeline. If the price of something is the *present value of
future cash flows*, then you will take the present value of a series of payments AND
then the present value of the maturity value (or in this case the face value).
ANSWERS
One can obtain a clear picture of a company's liquidity
by referring to its
A. Balance Sheet.
B. Income Statement - Answers - A. Balance Sheet
(liquidity refers to assets / cash, while income statement only deals with revenues,
expenses, and profits)
The advantages of obtaining funds by issuing debt,
rather than issuing additional common stock, include
which of the following?
A. Funds are obtained without surrendering
ownership control.
B. Funds are obtained without surrendering
ownership control, as well as, interest expense
is tax‐deductible.
C. The company's default risk decreases.
D. Interest expense is tax‐deductible. - Answers - B. Funds are obtained without
surrendering ownership control, as well as, interest expense is tax-deductible.
(but mostly the fact that it is done without surrendering ownership of the company)
Banks will charge a very profitable company a higher
interest rate as compared to a company with minimal
income since the high‐income business will be better
able to pay the extra interest cost.
A. True
B. False - Answers - B. Absorutery not
Banks do the opposite; they charge lower interest rates to profitable companies to
attract their business because there is less risk involved with profitable companies.
The lower the debt to equity ratio, the greater the
financial risk the company is taking.
A. True
B. False - Answers - B. Nuh uh
This makes sense because a LOWER debt to equity ratio means (debt/equity) is small
which means debt is small compared to equity, so therefore a LOWER debt to equity
ratio would imply the opposite; the company would be more financially stable.
,Cash flow generally limits the amount of debt a
business can finance.
A. True
B. False - Answers - A. True
Borrowing levels can INCREASE with *stable* and *predictive* cash flows
Think about credit score; the better credit score (more stable and predictive your credit
is) then the higher loans you can take out.
A debt to equity ratio of approximately .34 means that
one‐fourth of the company's assets are financed by
creditors.
A. True
B. False - Answers - A. Thomas the tank engine says tru tru
indicates creditors are financing 25%
of the company's assets
.34 is approximately .33 or 1/3
This means you have "1" debt for every "3" equity so for example:
Asset (200) = Debt (50) + Equity (150)
Debt/equity = 1/3
A callable bond allows the *holder* to repay the bonds
before their scheduled maturity date at a specified call
price.
A. True
B. False - Answers - B. Mmmmm no, not quite
Holder means the person who issued the bond while *borrower* means the person who
bought the bond. Callable bonds allow the person who HAS the bond to cash it in early.
Convertible bonds allow the borrower to convert each
bond into a specified number of shares of common
stock
A. True
B. False - Answers - B. B as in Bee as in Bfalse
Convertible bonds allow the bond HOLDER (the person who issued the bond) to
convert each bond into common stock.
, This makes sense as only the company has the right to issue common stock
The term used for bonds that are unsecured as
to principal is
A. series bonds.
B. indenture bonds.
C. debenture bonds.
D.callable bonds. - Answers - C. Debenture bonds
Unsecured Bond definition: Bonds (*debentures*) are not backed by collateral
The amount at a present time that is equivalent to a
series of payments and interest in the future.
A. Present value of a single amount
B. Future value of a single amount
C. Present value of an annuity
D. Future value of an annuity - Answers - C. Present value of an annuity
This is basically a fancy way of saying the *price* of an annuity, since all an annuity is is
a series of payments in the future.
The price is also known as the *present value of the future cash flows*
What measurement should be used when reporting
long‐term liabilities on a balance sheet?
A. Present value of the present outflow
B. Present value of the future outflow
C. Future value of the present outflow
D. Future value of the future outflow - Answers - B. Present value of the future outflow
This is basically saying the *price* of the long term liability is to recorded on the balance
sheet, as the *price* of something is just the *present value of the future cash flows*
The price of a bond is equal to:
A. The present value of the interest only
B. The future value of the face amount only
C. The future value of the face amount plus the
future value of the stated interest payments
D. The present value of the face amount plus the
present value of the stated interest payments - Answers - D. The present value of the
face amount plus the
present value of the stated interest payments
You can think of this on a timeline. If the price of something is the *present value of
future cash flows*, then you will take the present value of a series of payments AND
then the present value of the maturity value (or in this case the face value).
