C214 Financial Management Practice Questions - Set 3 - Part 2

Correct Answer: c) Increased financial leverage

Increased financial leverage means the firm is taking on more debt, which can increase the cost of capital due to higher perceived risk.

Correct Answer: c) Recording income and expenses when they are incurred, regardless of cash flow

Accrual accounting records income and expenses when they are incurred, not when cash is exchanged, providing a more accurate financial picture.

Correct Answer: c) Selling stock and repaying bonds

Selling stock and repaying bonds would decrease the firm’s financial leverage by reducing its reliance on debt.

Correct Answer: c) Return on equity (ROE)

Return on equity (ROE) measures a company’s profitability by showing how much profit it generates relative to the shareholders' equity invested.

Correct Answer: b) Yield to maturity (YTM)

Yield to maturity (YTM) is the total return an investor can expect if the bond is held until it matures, including both interest payments and the face value.

Correct Answer: b) Cash flow statement

The cash flow statement shows how cash moves in and out of the company over a period of time, indicating its liquidity and cash management.

Correct Answer: b) The bond’s face value to be repaid at maturity

The par value is the bond’s face value, which is the amount that will be repaid to the bondholder at the bond’s maturity.

Correct Answer: b) It mandates that financial statements be audited

The Sarbanes-Oxley Act requires public companies to have their financial statements audited by independent auditors to ensure transparency and prevent fraud.

Correct Answer: c) To match revenues with related expenses

The matching principle ensures that revenues and the expenses incurred to generate them are recorded in the same period, providing a clearer picture of profitability.

Correct Answer: b) The overall cost of financing for a firm, including both debt and equity

WACC represents the average rate of return a company is expected to pay its debt and equity holders for financing its operations.

Correct Answer: Issuing common stock

Financing activities in the cash flow statement include transactions related to raising capital, such as issuing common stock or repaying debt.

Correct Answer: Price and yield are inversely related

Bond prices and yields move inversely: when bond prices rise, yields fall, and when bond prices fall, yields rise.

Correct Answer: Current ratio

The current ratio compares a company’s current assets to its current liabilities, showing its ability to meet short-term obligations.

Correct Answer: NPV gives the dollar amount of profit

The Net Present Value (NPV) method calculates the actual dollar amount of profit, while IRR provides only the rate of return.

Correct Answer: Securities Act of 1933

The Securities Act of 1933 mandates that companies register with the SEC before offering securities to the public and provides investors with important information through a prospectus.

Correct Answer: Lower credit rating results in higher yields

Bonds with lower credit ratings carry more risk, which means they offer higher yields to attract investors, compensating them for the increased risk.

Correct Answer: Return on assets (ROA)

Return on assets (ROA) measures a company’s ability to generate profit from its assets by comparing net income to total assets.

Correct Answer: Secured bonds are backed by specific assets as collateral

Secured bonds are backed by collateral, such as property or equipment, whereas unsecured bonds are not, making the latter riskier.

Correct Answer: The bondholder’s total return if the bond is held to maturity

Yield to maturity (YTM) represents the total return a bondholder can expect if the bond is held until maturity, including interest payments and the repayment of the face value.

Correct Answer: To evaluate the firm’s overall cost of financing

WACC is used to evaluate the firm’s overall cost of financing, including both debt and equity, helping companies make investment and financial decisions.