Symphony — Pre-Assessment

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Western Governors University *

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D076

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Finance

Date

Jan 9, 2024

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 Attempt 1  Exemplary  Financial Environment — 15% of assessment COMPETENT What is Finance Suggested Study Review Financial Markets and Institutions Review Ethics in Finance Review 1 In which way is accounting different from finance?  Accounting forecasts future performance, given the past, while finance records past performance. You Selected  Accounting is focused on allocating capital, while finance is focused on bringing in capital.  Accounting is about budgeting, saving, and borrowing, while finance is about investing, forecasting, and lending. Correct  Accounting is backward looking, while finance is focused on the future. 

 2 What is the main question that both individuals and companies must consider when making financial decisions to reach a goal?  Will utility be maximized through this decision? You Selected  Will this decision require debt or equity financing?  Will this decrease the amount of cash available? Correct  Will the benefits of the action outweigh the costs? 3 A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of?  Managing interdepartmental loans Correct  Making financing decisions  Making investment decisions  Managing working capital 4 How can investing help a person reach personal financial goals?  It provides a guaranteed future outcome in order to predictably meet financial goals. Correct  It provides access to potential revenue or increases in value to help meet goals faster.  It helps a person understand how money was spent previously in order to reliably predict future expenses.  It ensures money is placed in a safe, risk-free, and easily accessible financial asset. 5 A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public?  Money market  Secondary market  Eﬃcient market Correct  Primary market Whi h f i i di h f h h d

 6 Which type of economic indicator changes after the economy changes and helps identify trends in the long term? Correct  Lagging indicator  Leading indicator  Yield curve indicator  Coincident indicator 7 How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy?  By raising capital on a contractual basis, such as an insurance contract  By accepting deposits of money, paying interest on deposits, and providing loans to individuals and organizations Correct  By providing individuals and firms access to financial markets to buy or sell financial securities  By insuring deposits in investment accounts up to $250,000 to promote public confidence 8 Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn?  Lagging indicator Correct  Leading indicator  Correlated indicator  Coincident indicator 9 Suppose an individual does not eat chocolate because eating chocolate goes against personal beliefs. Which type of standard is this? Correct  Moral  Ethical  Financial  Legal 10 Which action is based upon moral standards?

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 Correct  Although there is no company policy regarding it, a financial manager chooses not to accept gifts from the company’s clients to avoid creating a conﬂict of interest.  As outlined in the company’s policies, a financial manager hires a third-party entity to review all annual report filings to ensure they are compliant with applicable generally accepted accounting principles (GAAP).  Since it is generally accepted in the company that no personal information about clients should be released without written permission, a financial manager denies the request for a third party to access its data.  As mandated by government regulations, a financial manager files a registration statement with the U.S. Securities and Exchange Commission (SEC) before offering equity securities for sale. 11 What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects?  Release managers who do not attempt to maximize immediate shareholder value Correct  Set strict covenants that the company cannot uphold if it chooses a risky project  Encourage manipulation of accounting procedures to optimize the company’s profit  Separate owners from management so their interests do not conﬂict 12 What is the term for an individual’s beliefs concerning what is and is not acceptable to personally do?  Honesty  Laws  Ethics Correct  Morals  Fundamental Financial Principles — 30% of assessment EXEMPLARY Interest Rate, Required Rate, and Inﬂation Review

 Risk and Return Review 13 Which factor contributes to the inﬂation of the prices of goods and services over time?  Increase in purchasing power of goods and services  Decrease in costs of production  Decrease in employee demand for higher wages Correct  Increase in demand for goods and services 14 Why can compounding interest be a good tool but also a significant detriment? Correct  Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest.  Compounding interest can be a good tool to understand the time value of money, but it is a detriment because it does not take inﬂation into account.  Compounding interest can be a good tool because it summarizes the required return, but it is a detriment because it requires a larger cost of capital.  Compounding interest can be a good tool to understand opportunity cost, but it is a detriment because it does not take risk into account. 15 Which component of the required rate of return takes into account the loss of potential gain from other alternatives?  Inﬂation Correct  Opportunity cost  Risk  Hurdle rate 16 How is inﬂation calculated?  Inﬂation is built into the economy and will rise as employees receive salary raises.  Inﬂation is calculated by determining the rate at which the demand for particular goods and services has increased over a period of time in an

 economy.  Inﬂation is determined by the federal government at a target rate of 2% a year. Correct  Inﬂation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy. 17 Based on the following information about the stocks of several companies, which stock displays the greatest amount of risk? Stock A: Return = 22.22%, Standard Deviation = 9.99% Stock B: Return = 15.05%, Standard Deviation = 7.35% Stock C: Return = 38.83%, Standard Deviation = 4.54% Stock D: Return = 5.69%, Standard Deviation = 5.32% Correct  Stock A  Stock B  Stock C  Stock D 18 What is the relationship between risk and return?  The lower risk an investor takes, the higher return the investor expects to receive. Correct  The higher risk an investor takes, the higher return the investor expects to receive.  The lower risk an investor takes, the faster the investor expects to receive a return.  The higher risk an investor takes, the slower the investor expects to receive a return. 19 An investor is considering purchasing stock in a certain company, but the investor’s financial advisor suggests purchasing stocks in multiple companies instead of just one. Which risk management technique is this financial advisor suggesting?  Risk avoidance  Risk transfer

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 Correct  Risk diversification  Risk separation 20 An energy company discovers that a new bill has been proposed to change the amount of fuel that can be exported outside the country. If passed, this could have a serious negative effect on the company’s revenues. Some of the company’s competitors are obtaining insurance policies to compensate for this risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do nothing—ultimately taking responsibility for this particular risk instead of trying to transfer the risk through an insurance policy. Which risk management technique is this choice an example of? Correct  Risk retention  Risk separation  Risk avoidance  Diversification 59 Time Value of Money Calculations Download Workbook Task 1 An investor decides to invest $3,000 a year for the next 25 years, starting today, into an account that earns a 5% annual return. How much will the investor in 25 years? [-0.1] The value in cell C7 is not correct Task 2 An individual purchased land 12 years ago. The price of the land increased at the rate of 2% each year for the past 12 years, and the land would now sell for $35,000. How much did the individual pay for the land 12 years ago? Outstanding! You earned full credit for this task. Task 3 Today, Li has $900,000 (treat this as a cash inﬂow) in an account that gives an 8% return each year. Li has been investing $7,000 a year at the end of each year for 30 years. How much did Li have in the account 30 years ago? Fabulous! You earned full credit for this task. Task 4 Alex opened an investment account today with an initial investment of $50,000. Alex is going to then invest $8,000 a year for 30 years, starting a year from today. How much will

 Alex be able to withdraw in 30 years if the investment earns 6% annual interest? Excellent! You earned full credit for this task. Task 5 What is the present value of the cash ﬂows depicted on the table if the discount rate is 6%? Excellent! You earned full credit for this task. Task 6 What is the rate of return of the investment depicted in the table? Excellent! You earned full credit for this task. Task 7 What is the future value of $3,550 cash receipts per year at the end of each year for 10 years if the discount rate is 5%? [-0.1] The value in cell C32 is not correct Task 8 What was the present value, when the deposit was made, of a $50,000 withdrawal today that was deposited 12 years ago in an account with an annual interest rate of 3%? Excellent! You earned full credit for this task. Task 9 Kamal plans to save $7,000 a year for 17 years starting a year from today. He expects to earn 9% on his investment. How much will he have in 17 years? Fabulous! You earned full credit for this task. Task 10 Fatima is looking at a vacation that would cost her $6,000 today (assume this is a negative cash ﬂow). She makes a goal to go on the trip 14 years from today. The inﬂation rate is 3%. How much will it cost Fatima to go on the vacation in 14 years? Fabulous! You earned full credit for this task. Task 11 Lucas is wondering if he has enough money to cover his college tuition for the next four years. Annual tuition is $8,000 (assume this is a negative cash ﬂow) that is due at the beginning of each year with the first payment due today. If Lucas can earn a 2% return on his savings account, how much does he need to have in his account now to cover the cost of tuition? Outstanding! You earned full credit for this task. Task 12 A parent decided to save $5,000 a year for four years, starting a year from today, in an account that gives an interest rate of 5% to purchase a new car for a child when the child

 is ready to drive. What is the most the parent can afford to spend on a car in four years? [-0.1] The value in cell F50 is not correct  Financial Statement Analysis — 15% of assessment EXEMPLARY Financial Ratios Review 21 Which type of ratio should be used to examine the cost eﬃciency of a firm’s production?  Market  Eﬃciency Correct  Profitability  Liquidity 22 What is the process of analyzing financial data with ratios to compare a firm’s performance to competitors?  Valuing Correct  Benchmarking  Evaluating  Auditing 23 Which action will increase the return on equity of a firm?  Decreasing the debt financing of the firm  Increasing the liquidity of the firm Correct  Increasing the asset usage eﬃciency of the firm  Decreasing the profitability of the firm 24 Based on the information in the chart below, what can you conclude about Company A’s ability to collect its accounts receivable (AR)?

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 Entity Percentage of Sales on Credit AR Turnover AR Collection Period Industry 30% 12 30.42 Company A 30% 7 52.14  Company A collects its accounts receivable in a highly variable pattern compared to the industry.  Company A collects its accounts receivable just as quickly as the average of other firms in the industry. Correct  Company A is less eﬃcient at collecting its accounts receivable than the industry.  Company A is more eﬃcient at collecting its accounts receivable than the industry. 25 Which principle of ratio analysis means that ratios are open for analyst interpretation, are not governed by rules, and allow creativity to work according to a particular company or asset? Correct  Flexibility  Standardization  Focus  Evaluation 26 Why might an investor be concerned by how Company A is achieving its higher- than-industry return on equity? Entity Net Profit Margin Total Asset Turnover Leverage Multiplier Return on Equity Company A 7% 1.25 2.5 21.88% Company B 15% 1.30 1.3 25.35% Industry 8% 1.30 1.5 15.6%  The company’s return on assets is significantly higher than the industry’s. Correct  The company’s significantly higher use of debt could present a financial risk.  The company is more eﬃcient than the industry at using its assets to generate sales, and this may be unsustainable.  The company has a higher amount of profit generated per sales earned when compared to the industry.

 earned when compared to the industry. 27 An investor is analyzing a portfolio to decide if there are any stocks that should be removed from the pool of financial securities. Quiet Flag Industries, a company the investor has invested in, has just released its annual report. Which method should the investor use to see if the company has improved?  Progress measurement Correct  Trend analysis  Cross-sectional analysis  Focus analysis 28 Which type of ratios are banks and lenders most concerned about?  Activity  Eﬃciency  Profitability Correct  Liquidity 29 Which ratio helps an analyst evaluate whether a company can cover its short- term obligations?  Net margin Correct  Current ratio  Market-to-book ratio  Return on equity 30 Net Profit Margin Total Asset Turnover Leverage Multiplier Return on Equity Company 1 20.00% 1.5 2.5 75.0% Company 2 15.00% 0.83 2.0 25.0% Company 3 10.00% 0.5 3.0 15.0% Given the table above, what does the DuPont framework indicate about return on assets?  Return on assets is based on the amount of the firm’s debt and it

 equity. Correct  All returns are based on the firm’s profitability and eﬃciency.  The firm’s market ratio helps determine the price of the stock.  A firm can still have a high return on assets with low net income. 31 An investment analyst is concerned about a construction company’s ability to sell its inventory to meet current obligations, because much of the inventory (commercial buildings) it builds and sells takes longer than a year to construct. Which ratio should this analyst use to consider the effect of the firm’s inventory on the firm’s ability to meet current obligations?  Leverage ratio Correct  Quick ratio  Current ratio  Inventory ratio  Financial Forecasting and Budgeting — 20% of assessment EXEMPLARY Financial Forecasting Review Budgeting Review 32 An employee was recently hired as a financial analyst and asked to create a cash budget for the employee’s division for the next year. Which component should the employee exclude from the budget?  Payment toward the line of credit that is due next month  Purchase of inventory for sales that the employee will make this year  Payments to suppliers that will be made over the next six months Correct  Purchase of equipment that will be bought in three years 33 What are the benefits of using the traditional envelope method to track cash ﬂows?

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 ﬂows?  It requires users to carefully track specific expenses and write down their income and spending for the month.  It automatically separates expenses into categories so users can quickly assess their purchases during the month. Correct  It is simple and helps ensure that users do not spend more than the cash that they have available.  It enables users to connect bank and credit card accounts to automatically update income and expenses. 34 A company calculated variances of a budget and actual cash ﬂows that indicate the firm’s strengths and weaknesses in cash ﬂows and its budgeting process. Which major use of cash budgeting is this an example of?  Standardization  Assessment of future needs  Corrective action Correct  Performance evaluation 35 Which process is a person engaging in when making a personal budget and keeping a record of cash ﬂows? Correct  Tracking  Monitoring  Revising  Forecasting 36 Which type of expense is a magazine subscription?  Asset expense  Monitored expense  Fixed expense Correct  Variable expense 37 Which tool is forward-looking and thus helps decision makers understand how actions taken today can affect their firm’s future performance?  R ti l i

  Ratio analysis  Financial statements Correct  Financial forecasting  Accounting 38 A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company’s assets are increasing significantly, what else must increase?  Profit turnover  Gross margin  Accounts receivable turnover Correct  Financing 39 A company that manufactures televisions must obtain financing to increase the company’s inventory levels. A manager at the company knows that current investment markets are tight, and it may be diﬃcult for the company to obtain additional financing for the next year. The manager wants to propose a way for the firm to reduce its discretionary financing needed (DFN). What should the manager suggest to reduce next year’s DFN?  Increase the amount spent on fixed assets to increase production capacity  Increase sales growth, resulting in a larger amount of revenue coming into the firm Correct  Lower the amount of dividends that are paid out to shareholders next year  Lower the net margin by decreasing the sales prices and maintaining current costs 40 What is the term for the rate that allows a firm to maintain its present financial ratios without issuing new equity or increasing debt?  Steady state growth rate  Sales growth rate Correct  Sustainable growth rate  Capital growth rate

 41 Which method is most commonly used for determining a company’s DFN?  Sustainable growth rate Correct  Percent of sales  Historical regression  Company multiples 42 Freedom Rock Bicycles has a sales capacity of $10 million. When sales exceed this capacity, the company must invest $200,000 in new equipment. Freedom Rock Bicycles had sales of $9 million in one year, and it projects a sales growth of 10%. The net fixed assets in the year were $500,000. By how much will the company’s discretionary financing need increase? Correct  $0  $50,000  $200,000  $900,000 43 Why are financial models helpful in financial forecasting?  Models are required by the SEC when a firm plans to issue additional stock on the public market.  Models show the future supply schedule for a firm, which allows for negotiation with suppliers. Correct  Models allow users to see the complex relationships between sales and other aspects of the business.  Models provide credibility to a firm’s financial statements for government agencies to review. 44 A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year? Correct  No, because the increase in sales will not exceed the firm’s sales capacity.  No, because the increase in sales will exceed the firm’s sales

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 capacity.  Yes, because the increase in sales will exceed the firm’s sales capacity.  Yes, because the increase in sales will not exceed the firm’s sales capacity.  Financial Decision Making — 20% of assessment EXEMPLARY Investment Decisions Review Capital Investment Decisions Review 45 How does an analyst use the hurdle rate? Correct  It is used to compare with the IRR to determine whether a project should be accepted.  It is used to calculate the IRR for a project and determine its value.  It is used to determine the time frame of a project.  It is used with the IRR as a method to find the required payment amount for a project. 46 Which term refers to the metrics and calculations that use tools such as net present value (NPV), internal rate of return (IRR), and profitability index (PI) to evaluate investments?  Security analysis criteria Correct  Capital budgeting criteria  Accounting investment criteria  Projected financing criteria 47 What would profitability index (PI) be useful for? Correct  Determining whether a firm should invest in projects with different initial outlays  Calculating returns for a project that does not have a definite