C214 Financial Management Practice Questions - Set 4 - Part 1

Correct Answer: Current assets minus current liabilities

Net working capital measures a company’s short-term liquidity and is calculated by subtracting current liabilities from current assets.

Correct Answer: To decide which long-term assets to invest in

Capital budgeting involves making decisions about which long-term investments, such as equipment or new projects, a company should pursue for future growth.

Correct Answer: The interest rate that equates the present value of cash inflows and outflows

IRR is the discount rate at which the net present value of an investment is zero, representing the expected rate of return on a project.

Correct Answer: To ensure that financial statements are audited and accurate

The Sarbanes-Oxley Act was enacted to improve the accuracy and reliability of corporate financial reporting by requiring independent audits and greater oversight.

Correct Answer: Quick ratio

The quick ratio measures a company’s ability to meet short-term liabilities without relying on the sale of inventory by using its most liquid assets.

Correct Answer: To collect payments quickly and delay payments to suppliers

Efficient working capital management involves speeding up the collection of receivables and delaying payments to suppliers to maintain liquidity.

Correct Answer: The company’s reliance on debt financing

Degree of financial leverage (DFL) measures the extent to which a company relies on debt to finance its operations, with higher DFL indicating more debt.

Correct Answer: It is exempt from federal taxes

Municipal bonds are issued by state and local governments and are typically exempt from federal taxes, making them attractive to certain investors.

Correct Answer: Return on assets (ROA)

Return on assets (ROA) measures how efficiently a company uses its assets to generate profit, indicating overall asset efficiency.

Correct Answer: A secured bond is backed by specific collateral

Secured bonds are backed by assets that serve as collateral in case the issuer defaults, making them less risky compared to unsecured bonds.

Correct Answer: Debt-to-equity ratio

The debt-to-equity ratio compares a company’s total debt to its shareholders' equity, indicating the firm’s ability to meet long-term obligations.

Correct Answer: The bond sells at a discount

When the market interest rate is higher than the bond’s coupon rate, the bond sells at a discount to make up for the lower interest payments.

Correct Answer: Purchasing new equipment

Investing activities include purchases and sales of long-term assets, such as equipment or property, that are needed for operations.

Correct Answer: Cash flow statement

The cash flow statement provides a detailed account of the changes in a company’s cash position, broken down into operating, investing, and financing activities.

Correct Answer: To reduce overall risk

Diversification spreads investments across different assets to reduce the overall risk of the portfolio by minimizing the impact of any single poor-performing asset.

Correct Answer: Ability to meet short-term obligations

The current ratio measures a company’s ability to meet short-term liabilities with its current assets, providing insight into liquidity.

Correct Answer: A lower credit rating results in a higher yield

Bonds with lower credit ratings are riskier, and to compensate for the higher risk, they offer higher yields to attract investors.

Correct Answer: The stock’s true value, based on fundamental analysis

Intrinsic value is the true value of a stock as determined by fundamental analysis, and it may differ from the stock’s current market price.

Correct Answer: The required return on an asset, based on its risk

CAPM calculates the required return on an asset by incorporating both the risk-free rate and the risk premium, accounting for the risk of the asset.

Correct Answer: To monitor risks to the U.S. financial sector

The FSOC monitors risks to the U.S. financial system, particularly from large financial institutions, to prevent economic instability.