C214 Financial Management Practice Questions - Set 1 - Part 3

Correct Answer: b) Paying dividends

Paying dividends is considered a financing activity because it represents cash outflows related to the company’s capital structure and owners.

Correct Answer: c) To assess the firm’s overall cost of financing

WACC is used to determine the average cost a firm pays to finance its assets, which helps in evaluating potential projects and overall financing strategies.

Correct Answer: b) Hedging

Hedging involves entering into transactions that protect against the risk of fluctuating exchange rates, ensuring predictable costs in international trade.

Correct Answer: c) Volker Rule

The Volker Rule, part of the Dodd-Frank Act, limits the types of investments banks can engage in, specifically prohibiting proprietary trading.

Correct Answer: b) Return on assets (ROA)

Return on assets (ROA) measures a company’s profitability in relation to its total assets, indicating how efficiently the company is using its assets to generate profit.

Correct Answer: c) The time between receiving raw materials and getting paid for the finished product

The operating cycle measures the time from when raw materials are received until the company receives payment for the finished product, indicating the liquidity of the production process.

Correct Answer: a) Sarbanes-Oxley Act

The Sarbanes-Oxley Act mandates that CEOs and CFOs of publicly traded companies personally certify the accuracy of their financial statements to prevent fraud.

Correct Answer: c) It sells at par value

When the coupon rate equals the market rate, the bond will sell at par value, meaning its price is the same as its face value.

Correct Answer: a) Higher financial risk

An increase in a company’s debt ratio indicates higher financial leverage and, consequently, greater financial risk due to higher reliance on borrowed capital.

Correct Answer: c) Underwrite and sell the securities

Investment banks play a key role in underwriting IPOs, meaning they purchase the shares from the issuing company and sell them to the public, sharing the risk involved.