C214 Financial Management Practice Questions - Set 5 - Part 1

Correct Answer: It increases CFO

An increase in accounts payable means that the company has delayed payments to suppliers, which increases cash flow from operations by conserving cash.

Correct Answer: Income statement

The income statement shows a company’s revenues and expenses over a specific period, indicating whether the company made a profit or loss.

Correct Answer: Inventory

The quick ratio is a stricter measure of liquidity than the current ratio because it excludes inventory, which is considered less liquid.

Correct Answer: To show the company’s liquidity over time

The cash flow statement provides insight into a company’s liquidity by showing how cash moves in and out of the business through operating, investing, and financing activities.

Correct Answer: A bond that is not secured by collateral

A debenture is a type of unsecured bond that is not backed by specific collateral, making it riskier than secured bonds.

Correct Answer: The bond price decreases

When the market interest rate rises above a bond’s coupon rate, the bond price falls because investors demand a higher return than the bond is offering.

Correct Answer: The difference between the market return and the risk-free rate

The market risk premium in CAPM is the difference between the expected return on the market and the risk-free rate, representing the additional return required for taking on market risk.

Correct Answer: Current ratio

The current ratio measures a company’s ability to meet short-term obligations with its current assets, providing insight into its short-term liquidity.

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

Yield to maturity (YTM) represents the total return an investor can expect if they hold the bond until maturity, including interest payments and the repayment of the face value.

Correct Answer: Net present value (NPV)

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

Correct Answer: Coupon rate

The coupon rate is the interest rate that a bond issuer agrees to pay bondholders on a regular basis, typically annually or semi-annually.

Correct Answer: The company’s leverage

The debt-to-equity ratio measures a company’s financial leverage by comparing its total debt to its shareholders' equity, indicating how much debt is used to finance operations.

Correct Answer: To assess the firm’s cost of financing through debt and equity

The weighted average cost of capital (WACC) represents the overall cost of financing a company’s operations, including both debt and equity, and helps guide investment decisions.

Correct Answer: Depreciation

Depreciation is a non-cash expense that reduces a company’s net income, even though no cash is actually spent in the current period, reflecting the reduction in value of fixed assets over time.

Correct Answer: To measure the time between receiving inventory and collecting cash from sales

The operating cycle measures how long it takes for a company to purchase inventory, sell it, and collect payment from customers, providing insight into the firm’s operational efficiency.

Correct Answer: To reduce overall risk

Diversification reduces overall risk by spreading investments across multiple assets, lowering the impact of any single poor-performing investment.

Correct Answer: Return on assets (ROA)

Return on assets (ROA) measures how efficiently a company uses its total assets to generate profit, providing insight into overall asset efficiency.

Correct Answer: Higher sensitivity to changes in sales

A higher degree of operating leverage means the company has more fixed costs, which increases the sensitivity of earnings to changes in sales volume.

Correct Answer: The company’s ability to meet short-term liabilities without relying on inventory

The quick ratio excludes inventory from current assets, providing a more conservative measure of liquidity by focusing on assets that can be quickly converted to cash.

Correct Answer: To increase transparency in financial reporting

The Sarbanes-Oxley Act (SOX) was enacted to increase transparency in corporate financial reporting and to prevent fraud by requiring independent audits and certification by company executives.