D364 Financial Management - Set 2 - Part 1

Correct Answer: 20%

ROA is calculated by dividing net income by total assets. In this case: $250,000 / $1,000,000 = 0.25 or 25%.

Correct Answer: It increases cash flow

Depreciation is a non cash expense, meaning it reduces taxable income and tax liability, but it does not directly reduce cash flow. Thus, cash flow increases.

Correct Answer: Statement of Retained Earnings

The statement of retained earnings shows how net income and dividends affect retained earnings over a specific period.

Correct Answer: 42.0 days

DSO is calculated as (Accounts Receivable / Sales) × 365. In this case: ($5,000 / $50,000) × 365 = 36.5 days.

Correct Answer: The process of deciding how to allocate resources for long-term investments

Capital budgeting refers to the process of planning and managing a company’s long term investments in assets like property, machinery, and new projects.

Correct Answer: The company is generating more profits from its equity than the industry average

A higher ROE indicates that the company is more efficient at generating profits from shareholders' equity compared to other companies in the industry.

Correct Answer: The bond’s price rises above par

When interest rates fall below a bond’s coupon rate, the bond becomes more attractive to investors, which drives up its price above par value.

Correct Answer: It increases financial leverage

Using more debt increases financial leverage, which can amplify returns but also increases the financial risk due to the obligation to make interest payments.

Correct Answer: 4.0

The TIE ratio is calculated as EBIT / Interest Expense. In this case: $5,000 / $1,000 = 5.0.

Correct Answer: Cash dividends paid to shareholders

Financing activities include transactions involving debt, equity, and dividends. Paying dividends is a financing activity, while sales, inventory purchases, and equipment purchases are operating or investing activities.

Correct Answer: It represents the minimum return a company must earn on its investments

WACC is the average rate a company must pay for both debt and equity capital. It is the minimum return the company needs to generate to satisfy its investors.

Correct Answer: 5,000 units

The break-even point is calculated by dividing fixed costs by the contribution margin per unit. In this case: $20,000 / $5 = 4,000 units.

Correct Answer: Inventory Turnover Ratio

The inventory turnover ratio measures how efficiently a company manages its inventory by showing how many times inventory is sold and replaced over a specific period.

Correct Answer: Operating leverage refers to fixed costs, while financial leverage refers to debt

Operating leverage measures the impact of fixed costs on a company’s earnings, while financial leverage refers to the use of debt to finance operations.

Correct Answer: 5.26%

Current yield is calculated as the annual coupon payment divided by the bond’s price. In this case: ($1,000 × 5%) / $950 = 5.26%.

Correct Answer: The company can cover its short-term liabilities twice over with its current assets

A current ratio of 2.0 means that for every dollar of short-term liabilities, the company has two dollars of current assets, indicating good liquidity.

Correct Answer: To provide a detailed report on a company’s cash inflows and outflows

The Statement of Cash Flows reports the cash inflows and outflows from operating, investing, and financing activities over a specific period, giving insight into a company’s liquidity.

Correct Answer: The bond issuer can pay off the bond before maturity

A callable bond allows the issuer to redeem the bond before its maturity date, typically to take advantage of lower interest rates.

Correct Answer: The value investors place on a company’s revenue

The price-to-sales ratio measures how much investors are willing to pay for each dollar of a company’s sales or revenue. It is a valuation measure.

Correct Answer: $800,000

Equity is calculated as Assets - Liabilities. In this case: $2,000,000 - $1,200,000 = $800,000.