D076 Finance Skills study test

20 years ago Mateo started an investment account with $2000. He then invested $100 into the account every month at the end of each month. Today, he has $46,528 I. The same account. What is the term for the $100 monthly cash flows? - Annuity 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? - 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 A 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 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? - Set strict covenants 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 manufactures televisions must obtain financing to increase the company's inventory levels. A manager at the company knows that current investment markets are tight and may be difficult for the company to obtain additional financing for the next year. The manager wants to propose a way for the firm to reduce its discretionary financing needs (DFN). What should the manager suggest to reduce next year's DFN? - Lower the amount of dividends that are paid out to shareholders next year A financial manager of 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 next year. Which main task in business finance is this situation an example of? - 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 it's sales are predicted to increase by $6 million next year? - No, because the increase in sales will not exceed the firm's sales capacity A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? - 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? - Primary market. When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market. 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 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? - It may indicate an economic downturn. Since the long-term Treasury interest rate is lower than the short-term rate, it has an inverted yield curve, which may indicate an economic downturn. 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 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? - Risk retention An investment analyst is concerned about the construction company's ability to sell its inventory to meet current obligations because much of the inventory (commercial buildings) it builds and sells takes longer than a year to construct. Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's ability to meet current obligations? - Quick ratio An investor is analyzing a portfolio to decide if there are any stocks that should be removed from the pool of finance securities. Quiet Flag industries, a company the investor has invested in, has just released its annual report. Which method should the investor use to see if the company has improved? - Trend analysis An investor is considering purchasing stock in a certain company but the investor's financial advisor suggests purchasing stock in multiple companies instead of just one. Which risk management technique is this financial advisor suggesting? - Risk diversification An investor is reviewing the bonds of four different companies. Company A issues AA rated bonds, company B issues A rated bonds, Company C issues BB rates bonds, company D issues C rates bonds. Which company is likely to provide the lowest rate of return to the investor? - Company A An investor really cares about having voting rights in a firm. Which type of financial security should this investor purchase? - common stock Anna is planning to invest in some company stocks for retirement, and is trying to figure out if the stocks are a good buy. She calculates the intrinsic value of one of the stocks, quiet flag industries to be $35. The stock is currently trading on the market for $30, so she decides to buy it. Hey was it a good idea for Anna to buy this stock? - The stock is undervalued