Study Flashcards
What did the Dodd-Frank Act seek to prevent?
Banks making loans to borrowers with low incomes
Financial institutions becoming too big to fail
Conflicts of interest in audits by accounting firms
The loss of capital gains by large institutional investors
Financial institutions becoming too big to fail
What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with the rules of FINRA and Securities and Exchange Commision (SEC)?
Sales practices
Purchase practices
Payroll practices
Production practices
Sales practices
Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?
Prospectus
Annual report
10-K
10-Q
Prospectus
Which company control is required by the Sarbanes-Oxley Act?
Disclosure of off-balance sheet debts
Monthly evaluation of internal controls
Publication of detailed prospectus for investors
Announcement of annual public shareholder meetings
Disclosure of off-balance sheet debts
How does the SEC regulate the financial industry?
By requiring public disclosure of information about entities that sell public equity or debt
By providing advice to institutions and individuals who are considering making financial investments
By designing software, management systems, and other technologies to coordinate financial exchanges
By investigating the reasons behind poor investment decisions and organizational underperformance
By requiring public disclosure of information about entities that sell public equity or debt
Which term describes the amount of cash a firm needs in order to pay its immediate bills?
Operating balance
Reserve balance
Beginning balance
Working capital
Operating balance
What is the reason for holding cash and cash equivalents?
To provide liquidity
To ensure opportunity cost coverage
To ensure shortage cost coverage
To provide credibility
To provide liquidity
Which financial ratio is used to measure a company’s effectiveness in extending credit as well as collecting debts?
Accounts receivable turnover
Rate of return on sales
Times interest earned ratio
Earnings per share
Accounts Receivable Turnover
Which hybrid security has special claims on a corporation’s profits or , in case of liquidation, corporate assets?
Preferred stock
A person needs to determine the cost to replace a company’s property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination?
Book value
Present value
Market value
Historical value
Market Value
Which type of investment will a risk-averse investor most likely invest in?
Individual securities
Actively managed funds
Floating-rate securities
Index funds
Index funds
Which action is an important part of managing accounts receivable?
Setting credit terms
Determining optimal inventory levels
Managing disbursement float
Evaluating opportunity costs
Setting credit terms
What is the main benefit associated with holding inventory?
It maximizes the value of the company.
It makes it possible to meet the demands of customers.
It provides the company with an income tax shield.
It reduces current liabilities.
It makes it possible to meet the demands of customers.
How will an increase in corporate tax rates affect a firm’s cost of capital?
The cost of debt will decrease.
The cost of debt will increase.
The cost of equity will decrease.
The cost of equity will increase.
The cost of debt will decrease.
Why would a company prefer to raise capital by issuing debt instead of issuing new equity?
Debt financing provides greater solvency risk.
Debt financing provides interest tax benefits.
Debt financing provides less shareholders’ control.
Debt financing provides optimal capital structure.
Debt financing provides interest tax benefits.
How does the anticipation of bankruptcy affect a firm’s capital structure?
A firm facing bankruptcy will increase the relative amount of debt in order to increase payment to creditors rather than shareholders.
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.
A firm facing bankruptcy is not affected by any costs and therefore does nothing to restructure capital.
A firm facing bankruptcy is exempt from repaying debt and therefore restructures its capital structure towards debt.
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.
Company Y has a greater degree of financial risk than Company Z.
What would be a result of a 1% decrease in EBIT for both companies?
A greater percentage decrease in Company Y’s pre-tax profit
A greater percentage decrease in Company Z’s pre-tax profit
A greater percentage increase in Company Z’s pre-tax profit
A greater percentage increase in Company Y’s pre-tax profit
A greater percentage decrease in Company Y’s pre-tax profit
Company A has a degree of operating leverage of 1.85, and Company B has a degree of operating leverage of 6.5.
What does the degree of operating leverage say about these two companies?
Company A has lower risk than Company B.
Company A must have a lower increase in sales than Company B to achieve the same operating income.
Company A has lower debt than Company B.
Company A has higher fixed costs than Company B.
Company A has lower risk than Company B.
Why do companies strive for a lower cost of capital?
Less money dedicated to financing means more money is available for production and operations.
More money dedicated to financing means more money is available for production and operations.
A lower cost of capital positively affects credit rating.
A lower cost of capital means a higher debt-to-equity ratio.
Less money dedicated to financing means more money is available for production and operations.
Which advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?
CAPM does not rely on an estimate of the market risk.
CAPM is tied to relative market risk, which provides a less reliable estimate growth.
CAPM considers risk of a stock relative to the market to determine expected return.
The relative market risk is always constant.
CAPM considers risk of a stock relative to the market to determine expected return.
What are two examples of sunk costs?
The cost of a market study conducted prior to the decision
The cost of feasibility consulting incurred before the decision point
The cost of scrapping an old machine to replace with a new machine
The cost of disposing an old asset
The cost of a market study conducted prior to the decision
The cost of feasibility consulting incurred before the decision point
Which three pieces of data are needed to perform a capital budget analysis?
Choose 3 answers.
Annual cash flows for the life of the new project
Cash flow when the firm terminates the project
The estimated value of the firm’s stock price
The initial cost of the new project
The estimated value of the firm’s capital assets
Annual cash flows for the life of the new project
Cash flow when the firm terminates the project
The initial cost of the new project
How is the amount of discretionary financing that is needed by a firm determined?
Projected total assets − projected total liabilities + projected owner’s equity
Projected total assets + projected total liabilities − projected owner’s equity
Projected total assets + projected total liabilities + projected owner’s equity
Projected total assets − projected total liabilities − projected owner’s equity
Projected total assets − projected total liabilities − projected owner’s equity
Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available?
Choose 2 answers.
Increasing sales prices
Altering capacity
Increasing dividend payouts
Increasing costs
Increasing sales prices
Altering capacity
