C214 Financial Management Practice Questions - Set 2 - Part 1

Correct Answer: Collect quickly and pay slowly

Managing working capital effectively involves speeding up collections and delaying payments to hold onto cash longer.

Correct Answer: Investing activities

Investments in long-term assets, like equipment or buildings, appear in the investing activities section of the cash flow statement.

Correct Answer: Municipal bonds

Municipal bonds issued by state and local governments are generally exempt from federal taxes, making them attractive to investors in high tax brackets.

Correct Answer: The time it takes for a firm to use the payments from customers

Collection float refers to the time delay between when a firm receives a payment and when it can actually use the cash.

Correct Answer: Cash available to pay down debt or distribute to shareholders

Free cash flow represents the cash that remains after covering capital expenditures and working capital needs, which can be used for paying down debt or distributing to shareholders.

Correct Answer: Quick ratio

The quick ratio measures a company’s short-term liquidity by evaluating its ability to meet short-term obligations without relying on the sale of inventory.

Correct Answer: The last cash flow generated by the sale of an asset

Terminal cash flow refers to the cash flows generated from selling an asset at the end of a project’s life, often including salvage value.

Correct Answer: Increased risk and profitability

A higher degree of financial leverage increases both the risk and potential profitability, as more debt is used to finance the company.

Correct Answer: The growth rate achievable without external funding

The sustainable growth rate (SGR) reflects the growth a company can achieve using internally generated cash flow without relying on external funding.

Correct Answer: Accounts that change by management decision

Discretionary accounts, such as issuing bonds or purchasing equipment, do not vary automatically with sales but rather change based on management decisions.

Correct Answer: Interest tax benefits

Debt financing provides interest tax benefits, as interest payments on debt are tax-deductible, making it more cost-effective than equity financing.

Correct Answer: The interest rate offered by the company on the bond

The coupon rate is the interest rate the bond issuer promises to pay bondholders throughout the bond’s life.

Correct Answer: A discount

When the market rate is higher than the bond’s coupon rate, investors will require a discount on the bond to compensate for the lower interest payments.

Correct Answer: Its mix of debt and equity financing

Capital structure refers to the way a company finances its operations and growth through a combination of debt and equity.

Correct Answer: Depreciation

Depreciation is a non-cash expense that reduces taxable income, though it does not involve any actual cash outflow.

Correct Answer: It decreases the value of future cash flows

Inflation reduces the purchasing power of future cash flows, lowering their real value.

Correct Answer: The coupon rate remains the same

The coupon rate is fixed at issuance and does not change, even if the bond is sold at a premium or discount.

Correct Answer: The firm’s sensitivity to changes in sales

Degree of operating leverage (DOL) measures how sensitive a firm’s operating income is to changes in sales, with higher DOL indicating greater sensitivity.