C214 Financial Management Practice Questions - Set 2 - Part 2

Correct Answer: c) It may result in lost sales or stockouts

A high inventory turnover ratio may indicate that a company is running out of inventory too quickly, potentially leading to lost sales or stockouts.

Correct Answer: c) Exchange rate risk

Companies involved in international trade face exchange rate risk, as fluctuations in currency values can affect the cost and revenue of foreign transactions.

Correct Answer: c) To protect domestic industries

Tariffs are taxes on imports designed to protect domestic industries from foreign competition by making imported goods more expensive.

Correct Answer: c) To invest in long-term assets

Capital expenditures (CapEx) refer to funds used by a company to acquire or upgrade long-term assets, such as equipment or buildings.

Correct Answer: a) CAPM

The CAPM incorporates risk into its calculation by using the stock’s beta, making it superior in evaluating risk compared to the Gordon Growth Model.

Correct Answer: b) It decreases

A higher credit rating reduces the perceived risk of lending to the company, leading to lower borrowing costs and a decrease in the company’s cost of capital.

Correct Answer: c) Inverse relationship

Bond prices and yield to maturity have an inverse relationship—when bond prices increase, yields decrease, and vice versa.

Correct Answer: c) Discounted Cash Flow (DCF)

The Discounted Cash Flow (DCF) method values an investment by projecting its future cash flows and discounting them to the present value.

Correct Answer: a) It needs additional funding

When projected sales growth exceeds the SGR, the company will need to raise additional external funding to support its operations.

Correct Answer: b) Eliminating the risk of exchange rate fluctuations

Hedging involves entering into financial contracts to eliminate or reduce the risk of fluctuating exchange rates, ensuring predictable costs.

Correct Answer: b) Collateral backing the bond

Bonds with collateral backing (secured bonds) generally have lower yields because they carry less risk compared to unsecured bonds.

Correct Answer: b) To reduce risk

The primary goal of diversification is to reduce idiosyncratic risk by spreading investments across various assets, reducing the impact of a poor-performing asset on the portfolio.

Correct Answer: b) Securities Act of 1933

The Securities Act of 1933 requires that firms register with the SEC and make a prospectus available before they can sell securities to the public.

Correct Answer: a) Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act repealed key provisions of the Glass-Steagall Act, which had separated commercial and investment banking.

Correct Answer: b) Market risk

Market risk, also known as systematic risk, affects the entire economy or market and cannot be diversified away, unlike idiosyncratic risk.

Correct Answer: b) The additional return required for taking on higher risk

The risk premium represents the additional return that investors demand to compensate for the higher risk of an investment compared to a risk-free asset.

Correct Answer: c) It reflects the bond’s total return over its lifetime

Yield to maturity (YTM) considers both the bond’s interest payments and its face value, representing the total return an investor will earn if the bond is held to maturity.

Correct Answer: b) 10-Q

Publicly traded companies are required to file quarterly financial reports (10-Q) with the SEC to provide transparency and financial accountability.

Correct Answer: b) I/Y

The I/Y key on a financial calculator is used to input or calculate the interest rate per period, also referred to as the bond’s yield or market rate.

Correct Answer: b) Higher risk leads to a higher WACC

As a company’s risk increases, lenders and equity holders demand higher returns, leading to an increase in the firm’s weighted average cost of capital (WACC).