Question 1

Which of the following is a noncash expense?

Accepted Answer

Depreciation expenses are not a cash expense. Previosuly acquired assets systematically depreciate over their lifetime.

Question 2

If we add back the depreciation expense in a closing book value of fixed assets and deduct it from the opening balance of fixed assets, the positive value of the residual is the:

Accepted Answer

This is called the addition of assets.
If an asset is acquired during the period it is always on the debit side of the account. As depreciation expenses and the closing value of assets appear on the credit side of the account, the addition of assets is always calculated by deducting the opening balance from the closing balance and depreciation expenses.

Question 3

The company Panthers Limited has a return on investment (ROI) of 5% and it has a policy of a 20% net profit margin (NPM). What would be its total assets turnover (TAT) ratio?

Accepted Answer

TAT is always equal to ROI ÷ NPM. In this case, 5% ÷ 20% = 0.2, or 20%.

Question 4

The IRA has announced a reduction in tax rates. How will this change the NPM ratio of a company?

Accepted Answer

The lowering tax rates will decrease the company's NPM ration.
Taxes are deducted from gross profit to calculate net profit. Decreasing tax rates will decrease tax expenses, and the rediced expenses will improve the NPM ratio.

Question 5

You want to purchase a bond that will value $10,000 in 10 years. If the simple interest rate is 9.5% per year, what is the maximum amount you should pay right now?

Accepted Answer

You should buy a bond with a current value of $5128.
To find the principal invested amount (P) that will result in a total accrued amount of $10,000 (A) after 10 years (t) with a simple interest rate of 9.5% (r), we must input the values and solve for P:
A = P(1 + rt).
10,000 = P(1 + (0.095 x 10))
10,000 = P(1 + 0.95)
10,000 = P x 1.95
P = 10,000 / 1.95
P = 5128

Question 6

To increase the present value of any future cash flow, the interest rate should be:

Accepted Answer

When we decrease interest rate it will increase the PV.

Question 7

The objective of a matching proncipal is:

Accepted Answer

The objective of a matching principal is to recognize expenses in the same period in which income is earned.

Question 8

In general, revenue should be recognized:

Accepted Answer

Revenue should be recognized when it is virtually certain the amount will be collected.

Question 9

Which of the following is the definition of "pure risk"?

Accepted Answer

Pure risk is defined as a situation in which loss is the only possible outcome.

Question 10

Suppose the expected return on your treasury stock is 9% and the expected return on your market portfolio is 11%. With a beta coefficient of 1.1, the expected return on stock would be:

Accepted Answer

Your expected return on stock would be 11.5%.
Ri = Rf +(Rm - Rf)?j
Ri = .09+(11-.09)1.1 =11.2%

Question 11

A hedge position should provide a(n) ______________ position in market equilibrium.

Accepted Answer

Your option should be priced so that when it is combined with the stock in a hedged position, the return on the position equals the risk-free rate. To the extent that excess returns are available on a fully hedged position, people will have an incentive to take such positions. The impact of their transactions on relative prices will drive out any excess returns that might be earned. As a result, prices will adjust until the return on the hedged position is the same as the risk free rate and the option is neither overpriced nor underpriced.

Question 12

Suppose you have common stock of TigerCorp amounting to $100 million. At the end of the year, TigerCorp declares a dividend paid to common stock holders. The effect of the dividend on your investment would be:

Accepted Answer

Your investment would decrease in value.
A dividend is the partial liquidation of the company with respect to a stock holder, not an option holder.

Question 13

Suppose that the company Leopard Inc. is intending to make a huge investment in Lion Unlimited. Which type of risk is Leopard Inc. facing?

Accepted Answer

Leopard Inc. is facing a high degree of uncertainty of profit and loss due to investment, also known as strategic risk.

Question 14

A call option is a form of _____ insurance.

Accepted Answer

A call option is a form of price insurance, allowing an investor to purchase an asset at a specifically contracted price.

Question 15

Jerry Jaguar received an order from the CFP board on July 1, 2016. Now he intends to file an appeal against the order to the CFP Board's appeal committee in accordance with the rules and procedure of the appeal committee on August 2, 2016. What will be result of such an appeal?

Accepted Answer

A CFP board order will become final if the appeal is not filed within 30 days.

Question 16

Sam Serval's wife is the CFO of a leading manufacturing company. If Sam Serval is offered to provide some services related to financial planning for said company, which fundamental principal will be impaired if Sam Serval accepts the proposal?

Accepted Answer

Since Sam Serval's wife is employed in the position of CFO at the company, it would create a conflict of interest if Sam Serval were to accept the assignment. This conflict of inerest would undermine the integrity of the company.

Question 17

Investors prefer to hold more investment in bonds because they:

Accepted Answer

Bonds are less volatile than stock because their fluctuation depends on the interest rate of the economy as a whole.

Question 18

A prudent investor will always follow the principle of diversification of investments because:

Accepted Answer

A prudent investor will try to minimize the risk of loss through diversification.

Question 19

When the return on two different investment portfolios is negatively co-related, this indicates:

Accepted Answer

One investment shows a higher rate of return than the other

Question 20

Which of the following is true of an unsystematic risk?

Accepted Answer

Unsystematic risk is unique to specific investments.

Quiz 1: Foundation of Financial and Investment