C214 Financial Management Practice Questions - Set 4 - Part 3

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

Yield to maturity (YTM) is the total return an investor can expect if they hold the bond until maturity, accounting for both interest payments and the bond’s face value.

Correct Answer: The firm’s leverage, comparing total debt to shareholders' equity

The debt-to-equity ratio compares a firm’s total debt to shareholders' equity, indicating the firm’s leverage and its reliance on debt to finance operations.

Correct Answer: Quick ratio

The quick ratio measures a company’s liquidity by excluding inventory from current assets, providing a more conservative assessment of the firm’s ability to meet short-term obligations.

Correct Answer: To ensure full disclosure of financial information to investors

The Securities Act of 1933 requires companies to provide full disclosure of financial information to investors before issuing securities, promoting transparency and protecting investors.

Correct Answer: Net present value (NPV)

Net present value (NPV) calculates the present value of future cash flows by discounting them at a specific rate, helping to determine the profitability of an investment.

Correct Answer: The cash available to pay debt and distribute to shareholders

Free cash flow (FCF) represents the cash remaining after a company has covered its operating expenses and capital expenditures, which can be used to pay down debt or distribute to shareholders.

Correct Answer: The quick ratio excludes inventory

The quick ratio excludes inventory from current assets, providing a more conservative measure of liquidity compared to the current ratio, which includes all current assets.

Correct Answer: The time it takes to sell inventory and collect payment

The operating cycle measures the time between the purchase of inventory and the collection of payment for the sale of that inventory, reflecting the company’s efficiency.

Correct Answer: The yield increases

A credit rating downgrade increases the bond’s perceived risk, which raises the yield to attract investors willing to take on the higher risk.

Correct Answer: Capital budgeting

Capital budgeting involves making long-term investment decisions, such as purchasing new equipment or expanding operations, to ensure future profitability.