D364 Financial Management - Set 1 - Part 1

Correct Answer: Balance Sheet

The balance sheet reports a company’s assets, liabilities, and equity at a specific point in time. The income statement reports revenues and expenses over a period, the statement of cash flows reports cash movement, and the statement of retained earnings shows changes in equity from net income and dividends.

Correct Answer: Profit Margin × Asset Turnover × Equity Multiplier

The DuPont method breaks down ROE into Profit Margin × Asset Turnover × Equity Multiplier, which reflects how effectively a company is using its resources to generate profit for equity holders.

Correct Answer: Greater than 6%

When a bond is sold below face value, its yield to maturity is greater than the coupon rate because investors are earning more in terms of interest relative to their investment.

Correct Answer: Quick Ratio

The quick ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations using its most liquid assets. Debt-to-Equity is a leverage ratio, Return on Assets is a profitability ratio, and Gross Profit Margin is an efficiency ratio.

Correct Answer: Internal Rate of Return (IRR)

The IRR is the discount rate that forces the net present value (NPV) of a project’s cash flows to equal zero, representing the project’s expected rate of return.

Correct Answer: An outflow of cash

An increase in inventory means the company has spent cash to purchase inventory, representing an outflow in the operating activities section of the cash flow statement.

Correct Answer: The amount paid by the issuer at maturity

The face value (also called par value) is the amount the bond issuer promises to pay at the bond's maturity. It is different from the bond's trading price and coupon rate.

Correct Answer: Quick Ratio

The quick ratio excludes inventory from current assets to measure a company’s ability to cover short-term liabilities with its most liquid assets like cash and receivables.

Correct Answer: Beta

Beta measures a stock’s sensitivity to market movements. A beta of 1 means the stock moves with the market, while a beta higher than 1 means greater volatility relative to the market.

Correct Answer: 20%

ROA is calculated as Net Income / Assets. In this case, $20,000 / $200,000 = 0.1 or 10%.

Correct Answer: It includes market risk in its calculation

CAPM considers systematic risk (market risk) and relates it to expected returns. It does not account for unsystematic risk or guarantee returns, and dividend yield is not a factor.

Correct Answer: Yes, because the IRR is greater than the required return

If the IRR is greater than the company’s required rate of return, the project is expected to generate returns above the minimum acceptable threshold, making it a good investment.

Correct Answer: Financial leverage

The equity multiplier measures how much of a company’s assets are financed by equity versus debt. A higher equity multiplier indicates greater use of debt financing.

Correct Answer: The bond price decreases

There is an inverse relationship between bond prices and interest rates. When interest rates rise, existing bonds with lower coupon rates become less attractive, so their prices drop.

Correct Answer: Common stock

Common stock represents equity ownership in a company, giving shareholders voting rights and a claim to assets after debt and preferred stockholders in the event of liquidation.

Correct Answer: $1,300,000

Retained earnings at the end of the year is calculated by adding net income to the beginning retained earnings and subtracting dividends. $1,000,000 + $500,000 - $200,000 = $1,300,000.

Correct Answer: To estimate cash inflows and outflows for a specific period

A cash budget is used to project the company’s future cash inflows and outflows, helping to manage liquidity and ensure the company can meet its financial obligations.

Correct Answer: Depreciation

Depreciation is a non-cash expense, meaning it reduces taxable income without affecting cash flow. The other options involve cash transactions.

Correct Answer: Income Statement

The income statement reports a company’s financial performance, including revenues and expenses, over a specific period of time. The balance sheet shows a snapshot of assets, liabilities, and equity at a point in time.

Correct Answer: Return on Equity (ROE)

ROE measures how effectively a company is using its equity to generate profits. ROA measures profitability relative to assets, while debt-to-equity and current ratio measure leverage and liquidity, respectively.