D367 Innovation in Finance - Set 1 - Part 1

Correct Answer: Maximize the wealth of the owners

Financial management’s primary goal is to increase the value of the firm for its shareholders, which is often expressed in terms of maximizing the firm’s stock price.

Correct Answer: A conflict of interest between managers and shareholders

Agency problems occur when managers, who are supposed to act in the best interests of the shareholders, pursue their own goals instead of maximizing shareholder wealth.

Correct Answer: Balance sheet

The balance sheet provides a summary of the company's assets, liabilities, and shareholders' equity at a specific moment in time.

Correct Answer: Cash paid for inventory

Operating activities include cash inflows and outflows related to the core business operations, such as sales and expenses like inventory purchases.

Correct Answer: Current ratio

The current ratio is calculated by dividing current assets by current liabilities and measures a company’s liquidity, or ability to pay off its short-term obligations.

Correct Answer: The proportion of debt and equity used to finance the company’s assets

The debt-to-equity ratio is a financial leverage ratio that compares a company's total liabilities to its shareholder equity, indicating how much the company relies on debt versus equity financing.

Correct Answer: To summarize changes in equity, including retained earnings, over a period

The statement of retained earnings shows how much of the firm's profit is retained for reinvestment, rather than being paid out as dividends.

Correct Answer: Market value represents the actual value of equity in the market, while book value is the value recorded on financial statements

Market value reflects what investors are willing to pay for a company's stock, while book value is based on the accounting value of the company's assets and liabilities.

Correct Answer: Gross profit margin

Profitability ratios measure a company's ability to generate profit relative to revenue, assets, or equity. The gross profit margin compares gross profit to sales.

Correct Answer: Deciding whether to purchase a new machine for production

Capital budgeting decisions involve evaluating long-term investment opportunities, such as acquiring fixed assets like machinery.

Correct Answer: Rent or mortgage

Fixed expenses are those that remain the same each month, such as rent or mortgage payments, while variable expenses can fluctuate.

Correct Answer: It has fixed dividend payments

Preferred stock typically offers fixed dividends, which must be paid before any dividends can be paid to common stockholders.

Correct Answer: Dividend discount model

The dividend discount model estimates the value of a stock by calculating the present value of expected future dividends, assuming constant growth.

Correct Answer: The relationship between a company's stock price and its earnings per share

The P/E ratio compares the market price per share of a company's stock to its earnings per share (EPS), indicating how much investors are willing to pay per dollar of earnings.

Correct Answer: The company's ability to pay off short-term obligations

The current ratio is a liquidity ratio that shows whether a company has enough current assets to cover its current liabilities.

Correct Answer: The return a firm earns on its capital projects

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a project equal to zero.

Correct Answer: A market where existing securities are traded

Secondary markets, like the New York Stock Exchange (NYSE), are where investors buy and sell securities that have already been issued.

Correct Answer: Fixed interest payments

Bonds are debt instruments where the issuer agrees to pay the bondholder fixed interest payments, also known as coupon payments, at regular intervals.

Correct Answer: The ability to generate cash quickly without losing value

Liquidity refers to how easily an asset can be converted into cash without significantly affecting its value.

Correct Answer: To report a company's revenues and expenses over a period

The income statement, also known as the profit and loss statement, shows the company’s financial performance in terms of revenue and expenses over a specified period.