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Which of the following is likely to be correct for a company which invests in projects with Positive NPV? 
Select correct option: 

Company’s EVA (Economic Value Added) rises by the same value 
Company’s MVA (Market Value Added) or market value rises 
Company Shareholders’ Wealth rises 
All of the given options

Market Value Added (MVA), Net Present Value (NPV), and Economic Value Added (EVA) 
We use a measure called MVA in our assessment of a company’s net present value (NPV). In turn, we use a metric called EVA in our assessment of prospective  economic earnings. We begin with EVA, as it naturally leads to MVA, the market’s  efficient market assessment of NPV.
From a finance perspective, EVA is defined in terms of how it relates to the firm’s “market value added.” 
In theory (market efficiency), MVA is equal to the net present value (NPV) of the firm’s expected future EVA.
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm?
Select correct Option:
The firm has minimized its total carrying costs
The firm should increase its order size
The firm should decrease its order size
The firm has maximized its order costs

When marginal benefit (e.g., marginal reduction in order costs) exceeds marginal cost (e.g., marginal carrying cost of inventory) of increasing the order size, it worth doing it.

Which of the following is as EBIT?  
Select correct option:   
 Funds provided by operations 
 Earnings before taxes 
 Net income  
 Operating profit 

EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: 


EBIT =  Revenue - Operating  Expenses


Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and taxes added back to it


Security market line gives the relationship between _______ and _________.  

Select correct option:   
 Market risk and the required return 
 Systematic risk and the required return  
 Non-diversified risk and the required return  
 All of the given options
security market line   A straight line that shows the equilibrium relationship between systematic risk and expected rates of return for individual securities. According to the SML, the excess return on a risky asset is equal to the excess return on the market portfolio multiplied by the beta coefficient. 
In finance, systematic risk, sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with aggregate market returns

All of the following are the reasons for Uncertain NPV calculations EXCEPT:

Select correct option:
Estimated discount rate does not change with the markets
Estimated Life of project is doubtful
Annual after-tax cash flows are difficult to estimate
Timing of cash flows is not exactly predictable
Limitation of NPV analysis in Uncertain settings
 
1. Requires information about cash flow that may often not be known Characterizing the level of risk and uncertainty associated with a new and innovative strategy is itself an uncertain and risky undertaking
2. Assumes uncertainty and risk associated with a strategy remain constant over the life of that strategy Risk level differs over different periods, and is itself affected by strategic actions 
3.Fails to incorporate value of future strategies that are enabled by current strategy Path dependent nature of capability acquisition 

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Foundations of Financial Management, 13/e

 

 

Stanley B. Block, Texas Christian University
Geoffrey A. Hirt, DePaul University

Bartley R. Danielsen, North Carolina State University 

 

The Goals and Functions of Financial Management

 

1       

Which of the following are microeconomic variables that help define and explain the discipline of finance?

 

          A)      risk and return

          B)      capital structure

          C)      inflation

          D)      all of the above

 

Explanation: All of the above are relevant in explaining finance.

 

2                

One primary macroeconomic variable that helps define and explain the discipline of finance?

          A)      capital structure

          B)      inflation

          C)      technology

          D)      risk

 

Explanation: Technology is very important in explaining the field of finance.

 

3                

The money markets deal with _________.

          A)      securities with a life of more than one year

          B)      short-term securities

          C)      securities such as common stock

          D)      none of the above

 

Explanation: The money markets are concerned with short-term securities, those with a life less than one year.

 

4

The ability of a firm to convert an asset to cash is called ____________.

 

          A)      liquidity

          B)      solvency

          C)      return

          D)      marketability

 

Explanation: Liquidity also means how close an asset is to cash.

 

5       

Early in the history of finance, an important issue was:

 

          A)      liquidity

          B)      technology

          C)      capital structure

          D)      financing options

 

Explanation: Maintaining liquidity was a major concern historically.

 

6                

The ___________________ is the most common form of business organization in the U.S.

 

          A)      corporation

          B)      partnership

          C)      sole proprietorship

          D)      none of the above

 

Explanation: There are more sole proprietorships than any other form of business organization.

 

7                

The ____________________ has more sales in dollars than any other form of business organization.

 

          A)      sole proprietorship

          B)      partnership

          C)      corporation

          D)      none of the above

 

Explanation: The corporation is the most important in terms of dollars.

 

8                

One major disadvantage of the sole proprietorship is ________________.

 

          A)      simplicity of decision-making

          B)      unlimited liability

          C)      low operational costs

          D)      none of the above

 

Explanation: The owners of a sole proprietorship are personally liable.

 

9       

The appropriate firm goal in a capitalist society is ________________.

 

          A)      profit maximization

          B)      shareholder wealth maximization

          C)      social responsibility

          D)      none of the above

 

Explanation: The goal is to maximize the wealth of shareholders.

 

10     

The agency problem will occur in a business firm if the goals of ____________ and shareholders do not agree.

 

          A)      investors

          B)      the public

          C)      management

          D)      none of the above

 

Explanation: The goals of management may be different from those of shareholders.

Review of Accounting

 

1                

The accounting statements that a firm is required to file include all but one of these.

 

          A)      Balance Sheet

          B)      Statement of Accounts Receivable

          C)      Income Statement

          D)      Statement of Cash Flows

 

Explanation: The required statements include the income statement, balance sheet and statement of changes in cash flows. The statement of changes in owners equity (or retained earnings) is also required by Generally Accepted Accounting Principles but is not covered in this text.

 

2       

The _______________ shows the firm's operating results over a period of time.

 

          A)      Income Statement

          B)      Statement of Cash Flows

          C)      Balance Sheet

          D)      None of the above

 

Explanation: The Income Statement represents a moving picture of a firm's revenues and expenses.

 

3       

All of the following except one are tax-deductible expenses.

 

          A)      interest expense

          B)      depreciation

          C)      common stock dividends

          D)      income taxes

 

Explanation: Common stock dividends are not tax deductible to a firm.

 

4       

All of the following are non-operating expenses except _____________.

 

          A)      interest expense

          B)      cost of goods sold

          C)      preferred stock dividends

          D)      taxes

 

Explanation: The cost of goods sold is an operating expense.

 

5                

Bondholders receive _____________ from the business firm.

 

          A)      preferred dividend payments

          B)      common stock payments

          C)      interest payments

          D)      royalties

 

Explanation: Bondholders are typically paid interest semi-annually.

 

6                

The ratio of net income to common shares outstanding is called ______________.

 

          A)      price/earnings ratio

          B)      earnings per share

          C)      dividends per share

          D)      none of the above

 

Explanation: This is called the earnings per share (EPS).

 

7

Usually, firms with high price/earnings ratios are ____________ firms.

 

          A)      growth

          B)      declining

          C)      mature

          D)      none of the above

 

Explanation: A high p/e ratio indicates a firm with strong growth prospects

 

8

One of the limitations of the ____________ is that it is based on historical costs.

 

          A)      income statement

          B)      statement of cash flows

          C)      balance sheet

          D)      none of the above

 

Explanation: The balance sheet uses historical costs.

 

9                

A source of funds is a:

 

          A)      decrease in a current asset

          B)      decrease in a current liability

          C)      increase in a current liability

          D)      a and c above

 

Explanation: A decrease in current assets is equivalent to an increase in current liabilities.

 

10               

Short-term financing for a business firm includes:

 

          A)      bonds

          B)      accounts payable

          C)      stockholder's equity

          D)      mortgages

 

Explanation: The other three answers represent long-term financing

 

Financial Analysis

 

1                

Trend analysis allows a firm to compare its performance to:

 

          A)      other firms in the industry

          B)      other time periods within the firm

          C)      other industries

          D)      all of the above

 

Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firm’s performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry.

 

2       

Ratio analysis allows a firm to compare its performance to:

 

          A)      other firms in the industry

          B)      other time periods within the firm

          C)      other industries

          D)      all of the above

 

Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firm’s performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry.

 

3       

Usually, a firm's suppliers are most interested in its ________ ratios.

 

          A)      profitability

          B)      debt

          C)      asset utilization

          D)      liquidity

 

Explanation: The suppliers are most interested in getting paid, as shown by the liquidity of the firm.

 

4                

_______________ would be most interested in a firm's debt utilization ratios.

 

          A)      bondholders

          B)      stockholders

          C)      short-term creditors

          D)      Both A and B

 

Explanation: Debt is indicated by a firm issuing bonds but is also a function of the debt to equity relationship or the degree of financial leverage. Both bond holders and stockholders are interested in this relationship although frof opposing viewpoints.

 

5                

The _____________ ratio indicates the return firm shareholders are earning.

 

          A)      return on assets

          B)      return on investment

          C)      return on equity

          D)      net profit margin

 

Explanation: The shareholders represent equity, or ownership in the firm.

 

6                

Which of the following is an example of a profitability ratio?

 

          A)      Quick ratio

          B)      Average collection period

          C)      Return on equity

          D)      Times interest earned

 

Explanation: This is the only profitability ratio that is listed. All profitability ratios have net income in the denominator.

 

7                

Total asset turnover will indicate if there is a problem with the _________ ratio.

 

          A)      debt to assets

          B)      times interest earned

          C)      fixed asset turnover

          D)      current

 

Explanation: Fixed asset turnover is part of total asset turnover.

 

8                

All of the following are asset utilization ratios except:

 

          A)      average collection period

          B)      inventory turnover

          C)      receivables turnover

          D)      return on assets

 

Explanation: Return on assets is a profitability ratio. Any ratio with net income in the denominator is a profitability ratio.

 

9                

If a firm's debt ratio is 55%, this means ______ of the firm's assets are financed by equity financing.

 

          A)      55%

          B)      50%

          C)      45%

          D)      not enough information to answer question

 

Explanation: The equity portion plus the debt portion must add up to 100%.

 

10     

All of the following can present problems for ratio analysis except:

 

          A)      inflation

          B)      inventory accounting methods

          C)      disinflation

          D)      all of the above

 

Explanation: These all may cause problems

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