Question 1

Some small businesses have found that barter arrangements work better than demanding cash and can help them get at least some of what they are owed.

Accepted Answer

Barter arrangements allow small businesses to trade their goods or services for something they need without using cash. This can be helpful for getting some payment from customers who are unable or unwilling to pay with cash.

Question 2

Mirella Macedo works for Swictek Industries. Her primary responsibilities involve management of the firm's working capital and the analysis of long-term investment opportunities for Swictek. In which area is Mirella's job?
A) financial management
B) managerial accounting
C) operational budgeting
D) logistics

Accepted Answer

Mirella's job involves financial management, specifically working capital management and long-term investment analysis, which are key components of financial management. Therefore, choice A (financial management) is the best answer. Choice B (managerial accounting) is less accurate as Mirella's responsibilities do not appear to involve accounting tasks such as cost analysis or budgeting. Choice C (operational budgeting) and D (logistics) are also less accurate as Mirella's job is primarily focused on financial rather than operational or logistics tasks.

Question 3

How do today's financial managers generally feel about treating customers, employees, suppliers, creditors, and other stakeholders with fairness and respect?
A) They feel it often helps the firm build value for its owners.
B) They feel it is a job best left to other departments within the organization.
C) They feel it may be important from an ethical perspective but has little to do with meeting the firm's financial objectives.
D) They feel it is a more important goal than increasing the value of the firm to its owners.

Accepted Answer

Today's financial managers generally feel that treating customers, employees, suppliers, creditors, and other stakeholders with fairness and respect often helps the firm build value for its owners. This view is supported by research that shows that companies with good corporate social responsibility practices outperform those that don't. Financial managers recognize that treating stakeholders well can enhance the firm's reputation and strengthen its relationships, which can be beneficial to the firm's financial objectives in the long term.

Question 4

Net present value (NPV) is the sum of the present values of expected future cash flows from an investment minus the net cost of that investment. It measures the increase in shareholder value expected to result from an investment.

Accepted Answer

This is a correct definition of net present value (NPV).

Question 5

Long-term capital budgeting proposals often incur negative cash flows in the initial time period, but eventually they often generate positive cash flows.

Accepted Answer

This is true because long-term capital budgeting proposals often require initial investment in assets and infrastructure, which results in negative cash flows in the short-term. However, these investments are usually made with the expectation of future positive cash flows that will ultimately result in the success of the project.

Question 6

The time value of money is based on the idea that inflation erodes the purchasing power of the dollar.

Accepted Answer

The time value of money is based on the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity. This core principle is independent of inflation, although inflation can affect the future value of money.

Question 7

Which of the following functions must financial managers perform?
A) evaluating the firm's recent financial performance and planning wise use of financial resources, including working capital decisions and investment opportunity decisions
B) segmenting the market for the firm and deciding on distribution strategies
C) the development of the organization design and reporting structure so that the CEO and other top executives can efficiently implement their long-term strategic decisions
D) the accounting, auditing, and bookkeeping functions for the firm.

Accepted Answer

Financial managers must evaluate the firm's recent financial performance and plan for wise use of financial resources, including working capital decisions and investment opportunity decisions. Segmentation of the market and distribution strategies, as well as development of organization design and reporting structure, are not primarily the responsibility of financial managers. Additionally, while financial managers may oversee accounting, auditing, and bookkeeping functions, they do not necessarily perform those functions themselves.

Question 8

You have the opportunity to spend $1000 today to purchase an investment that will pay you $360 next year, $360 in two years, and $400 in three years. This is clearly a good deal because the total amount of money you will receive over this three-year period is $1120, which is more than the $1000 you'd have to pay for the investment.

Accepted Answer

The statement does not account for the time value of money, which means that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. Without considering the discount rate or the rate of return required for the investment to be considered a good deal, simply comparing the total future cash flows to the initial investment cost is not sufficient to determine if it's a good deal.

Question 9

The time value of money is the principle that a dollar received today is worth less than a dollar received in the future.

Accepted Answer

The time value of money principle actually states that a dollar received today is worth more than a dollar received in the future, due to its potential earning capacity.

Question 10

The net present value of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.

Accepted Answer

This is the correct formula for calculating net present value (NPV).

Question 11

Which of the following determines the types of assets needed to achieve the goals of the organization and determines the best way to obtain the funds needed to acquire those assets?
A) finance
B) asset management
C) credit
D) debt financing

Accepted Answer

Finance involves determining the types of assets needed to achieve organizational goals and figuring out the best methods to obtain the necessary funds to acquire those assets.

Question 12

A cash flow of $1000 received three years from today would have the same present value as a cash flow of $1000 received two years from today.

Accepted Answer

The cash flow received three years from today would have a lower present value than the cash flow received two years from today, assuming a discount rate greater than 0%. This is because the further into the future a cash flow is received, the less it is worth in today's dollars due to the time value of money.

Question 13

A wealthy relative offers you $1000 today but doesn't actually get around to giving you the money until a year later. The delay in receiving the money causes you to lose the opportunity to earn a year's worth of interest. This example illustrates the rationale for the time value of money.

Accepted Answer

The delayed receipt of money results in the loss of potential interest earnings, highlighting the concept of time value of money, which recognizes that money has a greater value today than in the future due to its earning potential.

Question 14

The present value of a cash flow received in a future time period is the amount of money which, if invested today at a specified rate of interest, would grow to become that future amount of money.

Accepted Answer

This is the definition of present value.

Question 15

The capital budgeting process evaluates proposals such as replacing existing machinery with more advanced models to reduce cost and improve the efficiency of current operations.

Accepted Answer

The statement is correct. Capital budgeting involves evaluating investment proposals, which can include replacing equipment to improve efficiency and reduce costs.

Question 16

Money market mutual funds are a way for small investors to get into the market for securities that would otherwise be too expensive for them to afford.

Accepted Answer

Money market mutual funds typically invest in short-term, low-risk securities like Treasury bills and certificates of deposit, making them a relatively affordable option for small investors. Additionally, because the fund is managed and diversified, investors can benefit from professional expertise and lower risk compared to buying individual securities.

Question 17

The sooner you receive a sum of money, the sooner you can put that money to work to earn even more money.

Accepted Answer

This statement is true. When you receive a sum of money earlier, you get more time to invest it or use it to earn interest, dividends, or profits. This can lead to a greater return on investment in the long run.

Question 18

Financial managers at Tuckerverse Corporation have just computed the NPV for a capital budgeting proposal and found that it is $1500. The financial managers are likely to approve this proposal.

Accepted Answer

A positive NPV indicates that the project will generate more cash flows than the initial investment, making it a profitable and beneficial project for the company. Therefore, the financial managers are likely to approve it.

Question 19

Leverage increases the expected return on paper of a shareholder's investments, but it also increases the firm's financial risk.

Accepted Answer

Leverage means that the company is using borrowed funds to finance its operations, which increases the potential return on investments for shareholders. However, it also increases the financial risk of the company because if the investments do not generate enough profits to cover the interest and principal payments on the borrowed funds, the company may default on its debt obligations.

Question 20

Historically, what has been the goal of financial management?
A) to maximize the value of the firm to its owners
B) to minimize financial risk
C) to ensure an adequate degree of liquidity
D) to maximize market share

Accepted Answer

The goal of financial management has traditionally been to maximize the value of the firm for its owners, which is typically measured as the price of the firm's common stock. This goal involves making decisions that will increase the firm's profitability and efficiency while minimizing its financial risk. Ensuring liquidity and maximizing market share may be important considerations, but they are not the primary goal of financial management.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value