Pro EXAMS

6.1 Debt—Loans and Bonds Introduction Assessment Section 1 1 1 / 1 Which of the following is an unsecured loan? • A car title loan • A furniture loan • Correct A credit card • A mortgage As explained in the text, loans that are not backed by specific assets (such as credit cards) are known as unsecured loans. Loans that are backed by specific assets (such as a home with a mortgage or a vehicle with a car loan) are known as secured loans. 2 1 / 1 Suppose that John has a 30-...

7.1 Equity Securities Introduction Assessment Section 1 1 1 / 1 Stockholders own the remaining earnings after operations are paid for and creditors are paid, making equity a _________ claim. • backlog • fixed • Correct residual • limited Stockholders have a residual claim on the earnings and the assets of the company. This means that, each year, after the company pays for its operations and pays its creditors, any residual or remaining earnings belong to the shareholders. 2 1...

8.1 Risk and the Capital Asset Pricing Model (CAPM) Introduction 8.2 Diversification through Portfolios Assessment Section 1 1 1 / 1 Diversification allows investors to maximize returns by keeping much of their portfolio in a single asset. • True • Correct False Diversification spreads one’s wealth across many assets to offset the possibility that a large negative return on one asset will destroy a large portion of an investor’s wealth. 2 1 / 1 Proper diversification should r...

9.1 Cost of Common Equity Introduction Assessment Section 1 1 1 / 1 According to a survey by Graham and Harvey (2001), the dividend discount (Gordon) model is more widely used by firms to calculate the cost of common equity than the capital asset pricing model. • True • Correct False The CAPM is the most popular, with over 70% of firms using it. 2 1 / 1 According to a survey by Graham and Harvey (2001), the capital asset pricing model is the most widely used method for calculating...

Assessment Section 1 1 1 / 1 In time value of money analysis, what is the nominal discount rate, r, equal to? • Discount Rate – Inflation • Discount Rate × Payments / Number of Periods • Real Risk-Free Rate × Risk Premium • Correct Real Risk-Free Rate + Inflation + Risk Premium The nominal discount rate is the sum of the rate earned on riskless investments with 0% inflation, inflation rate, and compensation for bearing the risk of a particular investment. 2 1 / 1 Which th...

4.1 Ratio Analysis Introduction—Why Ratios? Assessment Section 1 1 1 / 1 The ratios used in financial analysis are defined by GAAP. • True • Correct False There are no rules for ratios. You can make your own to meet your needs. 2 0 / 1 Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms? • Ratio analysis can be used to assess the need for cost cutting initiatives. • You Selected Ratio analysis can be used to compare thr...

3.2 The Statement of Cash Flows (SCF)—Overview and “The Myth” Assessment Section 1 1 1 / 1 Cash flow from operations (CFO) cannot be managed. • True • Correct False CFO can be dramatically impacted by managerial discretion in the financial reporting process. 2 1 / 1 The statement of cash flows categorizes cash flows into cash flow from operations, cash flow from production, and cash flow from financing. • True • Correct False Cash flow from production is not a catego...

Assessment Section 1 1 1 / 1 TellAll reports retained earnings of $1,122 and $1,402 for 20X1 and 20X2, respectively. Additionally, the firm paid dividends of $200 and $225 in 20X1 and 20X2, respectively. What was TellAll’s net income for 20X2? • $55 • $280 • Correct $505 • $1,225 New RE = Old RE + NI – Div $1,402 = $1,122 + NI – $225 NI = $505 2 1 / 1 Which of the following represent potential uses of net income under the accrual accounting system? • Retain within ...

Which of the following questions cannot be estimated by financial forecasting? • Correct How much have we made in the past? • How much will we need to finance a project? • How much DFN is needed? • How much will our sales be in the future? Historical financial statements show how much we have made in the past—this does not need to be forecasted. 2 1 / 1 Why is it important to use accurate estimates for financial forecasting? • To form accurate projected sales and financing ...

Assessment Section 1 1 1 / 1 What is capital budgeting? • The process of budgeting a firm’s monthly revenue and expenses • Correct The process of deciding which projects increase firm value Correct. Capital budgeting is the process of selecting long-lived projects that will enhance firm value. • The process of estimating the life of a new project • The process of estimating the cost to start a new project Capital budgeting is the overall process of selecting long-lived projec...