C214 Financial Management Practice Questions - Set 1 - Part 1

Correct Answer: Maximize shareholder value

The primary goal of a publicly traded company is to maximize shareholder value by balancing risk and profit, rather than simply maximizing profits.

Correct Answer: Fidelity

Financial firms like Fidelity manage pensions, 401Ks, and endowments, unlike non-financial firms that produce goods and services.

Correct Answer: Transparency

Transparency ensures that investors are well informed about the risks and returns of an investment, which is a key requirement for market efficiency.

Correct Answer: Sell

If the intrinsic value is less than the market price, the stock is overvalued, and it’s likely not a good buy, so investors should consider selling.

Correct Answer: The increase in money due to interest or dividends

The time value of money refers to the increase in an amount of money over time due to interest or dividends earned.

Correct Answer: Sell stocks and bonds to raise cash

Non-financial firms raise money by selling stocks and bonds, which helps them grow and succeed.

Correct Answer: Investors only

In the secondary market, stocks and bonds are traded between investors, and the firm is not involved.

Correct Answer: Priority over common stock in bankruptcy

Preferred stockholders have priority over common stockholders in the event of bankruptcy, although they do not have voting rights.

Correct Answer: Current assets - current liabilities

Net Working Capital (NWC) is calculated by subtracting current liabilities from current assets, reflecting the short-term liquidity of a company.

Correct Answer: Comparing one firm’s ratios over time

Trend analysis involves comparing a firm’s ratios over time to identify performance trends and areas of improvement.

Correct Answer: Current ratio

The current ratio measures a company’s ability to pay short-term obligations with its current assets, indicating liquidity.

Correct Answer: The interest rate paid on the bond

The coupon rate is the interest rate that the bond issuer agrees to pay bondholders periodically.

Correct Answer: Bond prices decrease

There is an inverse relationship between bond prices and market yields. When yields go up, bond prices go down, and vice versa.

Correct Answer: To regulate and ensure transparency in financial markets

The SEC requires all publicly traded corporations to file audited reports, such as 10-K and 10-Q, to maintain transparency in financial markets.

Correct Answer: A non-cash expense

Depreciation is a non-cash expense that reduces taxable income but does not directly affect the cash flow of a business.

Correct Answer: PV

The PV key on a financial calculator is used to input or calculate the present value of a bond or any other financial asset.

Correct Answer: Financing activities

Dividends are part of financing activities because they represent payments made to the company's investors or owners.

Correct Answer: Capital Asset Pricing Model (CAPM)

The CAPM evaluates expected return by considering the risk (measured by beta) of a stock relative to the market.

Correct Answer: It is more volatile than the market

A beta value greater than 1 indicates that the stock is more volatile and riskier compared to the market average.

Correct Answer: Return on equity (ROE)

Return on equity (ROE) measures how effectively a firm is generating profit from shareholders' equity.