Financial Insights Quiz
Financial Insights Quiz
Test your understanding of key financial concepts and decision-making processes with our Financial Insights Quiz! Designed for both beginners and seasoned professionals, this quiz consists of multiple-choice questions that will challenge your knowledge of capital budgeting, cash flow analysis, depreciation, and project evaluation.
Get ready to dive into topics such as:
- Capital structuring
- Cash flow management
- Financial ratios
- Investment appraisal methods
Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
Increase the dividend payout ratio for the upcoming year.
Reduce the percentage of debt in the target capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in order to increase the current ratio.
Increase the percentage of debt in the target capital structure.
Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
The company issued new long-term debt.
The company cut its dividend.
The company sold a division and received cash in return.
The company issued new common stock.
The company made large investments in fixed assets.
A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?
Issue new common stock and use the proceeds to acquire additional fixed assets.
Issue new common stock and use the proceeds to increase inventories.
Speed up the collection of receivables and use the cash generated to increase inventories.
Use some of its cash to purchase additional inventories.
Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
The company’s dividend payment to common stockholders declined.
The company’s expenditures on fixed assets declined.
The company’s cost of goods sold increased.
The company’s interest expense increased.
The company’s depreciation expense declined.
Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI’s net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI’s financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
The provision will reduce the company’s cash flow.
The provision will increase the company’s tax payments.
The provision will increase the firm's operating income (EBIT).
The provision will increase the company’s net income.
Net fixed assets on the balance sheet will decrease.
The relative risk of a proposed project is best accounted for by which of the following procedures?
Ignoring risk because project risk cannot be measured accurately.
Adjusting the discount rate upward if the project is judged to have below-average risk.
Reducing the NPV by 10% for risky projects.
Picking a risk factor equal to the average discount rate.
Adjusting the discount rate upward if the project is judged to have above-average risk.
Langston Labs has an overall WACC of 10% which reflects the cost of capital for its average asset.
A and B
A,B, and C
A, B, C, and D
A,B,C,D and E
A, B, and D
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.
If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.
If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.
The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.
Which of the following statements is CORRECT?
The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.
The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.
Which of the following statements is CORRECT?
An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank’s other offices.
If sunk costs are considered and reflected in a project’s cash flows, then the project’s calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.
A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
Which of the following statements is CORRECT?
An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
Identifying an externality can never lead to an increase in the calculated NPV.
The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase.
Which of the following statements is CORRECT?
Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
Accelerated depreciation can increase the project’s risk.
Accelerated depreciation can decrease the project’s risk.
Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.
Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.
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