Question 1

Accurately forecasting cash flows can be a challenge for financial managers as they must analyze only which of the following?

Accepted Answer

Financial managers must analyze only the relevant cash flows for accurately forecasting cash flows, as these are the cash flows that are directly related to the specific decision or project being analyzed. Future, potential, and projected cash flows may not necessarily be relevant to the analysis and may not accurately reflect the actual cash flows that will occur.

Question 2

A wealthy relative promises to give you $5000 when you complete all of the college courses needed to earn a degree in business.The present value of this future sum must be which of the following?

Accepted Answer

The present value of a future sum is less than the future sum itself because it accounts for the time value of money, which depends on the interest rate and the time until the sum is received.

Question 3

Which term is used to describe the mix of equity and debt financing a firm uses to meet long-term financing needs?

Accepted Answer

Capital structure refers to the mix of equity and debt financing that a firm uses to meet its long-term financing needs. The specific combination of equity and debt financing that a firm chooses can have a significant impact on its cost of capital, financial risk, and ultimately its overall value.

Question 4

Which of the following proposals would be considered under capital budgeting?

Accepted Answer

Introducing an entirely new product line would involve significant investment and long-term impact on the company's financials, making it a proposal for capital budgeting. The other options are related to operational or marketing decisions and would be considered under operating budgeting.

Question 5

Flying High Inc.is trying to decide whether to invest in a new robot for its packaging line.The new robot will cost $370 000 and is expected to significantly increase efficiency and thus save the company $67 000 per year for the next eight years.At that time,the robot will be completely depreciated and may not have any salvage value.As part of the financial management team for Flying High,you are assigned to evaluate this proposal.A key part of your analysis will probably consist of a computation.What do you need to compute about the proposal?

Accepted Answer

It is important to compute the net present value of the investment in order to determine if it is a financially viable decision. This calculation takes into account the initial cost of the investment, the cash flow savings over the years, and the time value of money. In this case, the net present value will indicate if the investment will generate a positive or negative return and will help in making an informed decision.

Question 6

What are the two primary sources of equity financing?

Accepted Answer

The two primary sources of equity financing are direct owner contributions (such as investments in the company) and retained earnings (profits that are reinvested back into the business). The other answer choices are not accurate sources of equity financing.

Question 7

Which term is used to describe the use of debt in a firm's capital structure?

Accepted Answer

Financial leverage is the term that describes the use of debt in a firm's capital structure. It refers to the practice of borrowing funds to increase the potential return on investment for shareholders. It can be a useful tool for companies to finance growth and expansion, but it also increases the risk of financial distress in the event of economic downturns or other challenges.

Question 8

What is the term for the conditions lenders place on firms that seek long-term financing?

Accepted Answer

The term for the conditions lenders place on firms that seek long-term financing is covenants. Covenants are designed to protect lenders from the risk of default on the part of the borrower, by setting restrictions on financial and operating performance. These covenants could include limitations on capital expenditures, debt-to-equity ratios, or minimum levels of cash flow coverage, among others.

Question 9

What is the main advantage of financial leverage?

Accepted Answer

The main advantage of financial leverage is that it can increase the expected return to shareholders. This is because when a firm uses debt to finance its operations, it can increase its earnings per share (EPS) by paying less in interest expenses than it earns in profit. This can lead to a higher return on equity (ROE) for shareholders. However, it is important to note that financial leverage also increases the risk of the firm, so it should be used judiciously. Choices A, C, and D are incorrect as they do not reflect the main advantage of financial leverage.

Question 10

Danielle,the regional manager of CDz music store,is trying to determine if the store should invest in a new computerized inventory tracking system.Using financial analysis,she would decide that the investment was desirable in which of the following situations?

Accepted Answer

A positive net present value (NPV) indicates that the investment will generate more cash over time than the initial cost of the investment. Therefore, if the NPV is equal to or greater than zero, it means that the investment will provide financial benefits and is desirable. The other options (A, C, and D) do not provide a comprehensive financial analysis of the investment's profitability.

Question 11

Financing provided by a firm's owners is classified as what type of financing?

Accepted Answer

Financing provided by a firm's owners is typically in the form of equity financing, which represents an ownership stake in the company. This is different from debt financing, which involves taking on loans or issuing bonds to investors. Unrestricted financing and primary financing are not commonly used terms in finance.

Question 12

Financial managers measure the benefits and costs of long-term investment proposals in terms of which of the following?

Accepted Answer

Financial managers measure the benefits and costs of long-term investment proposals in terms of the cash flows it will generate.

Question 13

Dan inherited $1000 from his grandmother's estate.He has found an investment opportunity that will earn 7% interest compounded annually each year for the next two years.If he puts his money into this investment,what will he earn in interest at the end of two years?

Accepted Answer

First year interest: $1000 x 7% = $70
Second year interest: ($1000 + $70) x 7% = $77
Total interest earned over two years: $70 + $77 = $147
Therefore, option D is the correct answer.

Question 14

Which of the following is intended to protect creditors by preventing borrowers from pursuing policies that might jeopardize the lenders' funds?

Accepted Answer

Covenants are agreements in a loan contract that specify certain actions or restrictions that the borrower must follow to protect the lender's funds. These can include requirements for maintaining certain financial ratios, limits on additional borrowing or investments, restrictions on dividend payments or asset sales, and other policies or actions that might negatively impact the borrower's ability to repay the loan. By implementing these covenants, lenders can help ensure that their funds are used appropriately and minimize their risk of default. Factors are financial institutions that purchase and manage accounts receivable from businesses, while discounts are reductions in the price of goods or services. Debts refer to amounts owed by a borrower to a lender or creditor, but do not specifically address how those funds are protected.

Question 15

Jason,the regional manager for a large electronics firm,is trying to determine whether a new warehouse is a good investment.After working with his firm's financial managers,he concludes that the project carries a negative net present value.What should Jason do-and why?

Accepted Answer

A negative NPV indicates that the costs of the investment outweigh the present value of the expected cash flows. Therefore, investing in the warehouse would not be profitable and would not be justified by the possible benefits. Option A is incorrect because the negative NPV does not necessarily mean that the firm cannot afford the investment; it simply means that the investment would not be profitable. Option B is incorrect because a negative NPV implies that the investment cost is higher than the expected cash flows, regardless of the cost of financing. Option D is incorrect because a negative NPV does not necessarily mean that failing to invest will reduce the value of the firm to shareholders.

Question 16

Sally Snooks has recently completed this class.While attending her company's holiday party,she hears one of the executives mention that the company is heavily leveraged.Sally,who recently bought 300 shares in the company's stock,is very interested in this bit of information.What does Sally understand such leverage will do for her?

Accepted Answer

When a company is heavily leveraged, it means that it has a significant amount of debt. This can lead to a higher return on investment when times are good, but it can also lead to a lower return when times are bad. In the event of a downturn, the company may struggle to make payments on its debt, which could cause the value of the stock to decline. Sally understands that leverage could increase her return on investment, but also comes with higher risk. Therefore, the best choice is D.

Question 17

Investing in fixed assets would be classified as which type of budgeting?

Accepted Answer

Investing in fixed assets involves making long-term strategic decisions related to the acquisition of new fixed assets or the improvement of existing ones. This type of budgeting is referred to as capital budgeting. Operating budgeting focuses on day-to-day operations, master budgeting encompasses both operating and capital budgeting, and working capital budgeting pertains to managing the company's short-term cash flow.

Question 18

When a firm reinvests some of its net income rather than distributing it all to owners,the result for the firm is an increase in which of the following?

Accepted Answer

When a firm reinvests some of its net income, it retains the earnings within the company rather than paying them out as dividends to owners. This increases the amount of money in the company's retained earnings account, which can be used for future investments or to pay off debts. A) Covenants and B) net liabilities are not affected by a firm's decision to reinvest net income. D) Dividends would decrease if the firm chooses to reinvest net income instead of distributing it to owners.

Question 19

Alison has $5000 to invest and is trying to decide between two investment opportunities.One investment offers her future cash flows of $2000 for each of the next five years.Another investment offers her future cash flows of $5000 in year five and $7500 in year six.In order for her to compare the future cash flows of these two investments,what will she need to calculate?

Accepted Answer

In order to compare the future cash flows of these two investments, Alison will need to calculate the present value of both investments. This will allow her to see which investment will provide her with the most value in today's dollars. Option A (annuity value) and option B (average annual payout) may be useful calculations in certain investment scenarios, but they are not necessary for this particular comparison. Option C (common payout value) is not a commonly used financial term and does not apply in this situation. Therefore, the best choice is option D (present value).

Question 20

Which of the following tells us that a dollar received today is worth more than a dollar received in the future?

Accepted Answer

The time value of money states that a dollar received today is worth more than a dollar received in the future because of the potential for earning interest or investing it.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value