Question 1

Which process does a firm use to evaluate long-term investment proposals?

Accepted Answer

The process that a firm uses to evaluate long-term investment proposals is capital budgeting. This process involves analyzing and selecting the investment opportunities that will generate the most significant return on investment and align with the company's strategic goals. Capital budgeting helps a company decide how to invest its resources efficiently to achieve the best possible financial results.

Question 2

Explain how a firm can increase shareholder value by acting in a socially responsible manner.

Accepted Answer

The answer of Explain how a firm can increase shareholder...

Question 3

Which of the following are short-term, very safe, and highly liquid assets firms include in the cash holdings they report on their balance sheet?

Accepted Answer

Cash equivalents are short-term assets that are very safe and highly liquid, such as treasury bills, certificates of deposit, and commercial paper. Cash options and marketable derivatives are not typically included in cash holdings and may not be as safe or liquid. Intangible assets are non-physical assets that are not considered cash holdings.

Question 4

Jasmine started a small business two years ago. The business is just now seeing some success, and Jasmine notes that she has a few thousand dollars more in her bank account than she currently needs to pay her bills. However, because of the uncertainty of cash flows in her new business, she is concerned that she may need access to these funds on fairly short notice in the future. Given this situation, what should Jasmine do?

Accepted Answer

Putting excess cash into money market mutual funds is a good choice in this situation because it provides liquidity and easy access to the funds if needed in the short term. Money market mutual funds typically invest in low-risk, short-term debt securities, so they are relatively safe and offer a modest return on investment, making them a better choice than keeping the funds in a chequing account. Buying intangible assets or investing in common stocks may not be the best choice as they are not as liquid and have more volatility in returns, which may make it difficult for Jasmine to access the funds quickly if needed.

Question 5

What do we call short-term IOUs issued by the government that mature in 4, 13, and 26-week increments?

Accepted Answer

Short-term IOUs issued by the government that mature in 4, 13, and 26-week increments are called T-bills. Debentures are a type of long-term debt instrument, and treasury bonds are long-term government securities with maturities of 10-30 years. Money market mutual funds are not government-issued debt securities, but rather investment funds that invest in short-term, low-risk securities such as T-bills.

Question 6

A wealthy relative promises to give you $5000 when you complete all of the college courses needed to earn a degree in business. What must the present value of this future sum be?

Accepted Answer

The present value of a future sum of money is always less than the future sum due to the time value of money, which is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. The exact value depends on the time it takes to earn the degree and the interest rate, as these factors affect how much the money could have grown if invested.

Question 7

Flying High Inc. is trying to decide whether to invest in a new robot for its packaging line. The new robot will cost $370,000 and is expected to significantly increase efficiency and thus save the company $67,000 per year for the next eight years. At that time, the robot will be completely depreciated and may not have any salvage value. As part of the financial management team for Flying High, you are assigned to evaluate this proposal. A key part of your analysis will probably consist of a computation. What do you need to compute about the proposal?

Accepted Answer

To evaluate the proposal, we need to compute the net present value (NPV) of the investment. This takes into account the initial cost, cash inflows (savings), and the time value of money. The NPV calculation will help us determine if the investment is profitable and if it adds value to the company. A positive NPV would indicate that the investment should be made.

Question 8

Financial managers measure the benefits and costs of long-term investment proposals in terms of which of the following?

Accepted Answer

Financial managers measure the benefits and costs of long-term investment proposals in terms of the cash flows they will generate. This helps to determine the value and feasibility of the investment. The other options mentioned, such as how accounts receivable will be affected or lines of credit needed, are important factors to consider in financial management but do not directly measure the benefits and costs of the investment proposal.

Question 9

Which of the following consists of the stocks of goods, materials, parts, and work-in-process that firms hold as part of doing business?

Accepted Answer

Inventory consists of the stocks of goods, materials, parts, and work-in-process that firms hold as part of doing business. Current assets refers to a category of assets that can be converted to cash within a year, fixed assets are long-term assets such as property and equipment, and accounts receivables are money owed to a company by its customers.

Question 10

Which of the following is one drawback of offering credit customers more time to pay?

Accepted Answer

Offering credit customers more time to pay delays the receipt of cash for the firm, which could negatively affect the firm's ability to pay its own obligations on time. This delay in cash receipt could also impact the firm's cash flow and working capital.

Question 11

What is the primary goal of financial management? Provide two examples of how being socially responsible may benefit a company and meet the primary goal of financial management. Explain your answer.

Accepted Answer

The answer of What is the primary goal of financial...

Question 12

Which of the following tells us that a dollar received today is worth more than a dollar received in the future?

Accepted Answer

The time value of money holds that money has time value and that a dollar received today is worth more than a dollar received in the future due to the potential earning capacity of the present money through investment or simply due to inflation decreasing the purchasing power of money over time.

Question 13

Which cash equivalent raises funds by selling shares to large numbers of investors and then pools these funds to purchase short-term, liquid securities?

Accepted Answer

Money market mutual funds raise funds by selling shares to large numbers of investors and then pool these funds to purchase short-term, liquid securities. M2 index funds track a broader range of money supply measures and do not necessarily invest in short-term, liquid securities. T-bills are short-term, liquid securities but are not an option for raising funds. Exchange funds allow investors to exchange low-cost basis stocks for a diversified portfolio but do not necessarily invest in short-term, liquid securities.

Question 14

Which of the following represents an advantage of offering more lenient credit terms to a firm?

Accepted Answer

Offering more lenient credit terms can attract customers to purchase from the firm, leading to an increase in sales. This can help compensate for the potential increase in bad debt expenses from offering more flexible credit terms.

Question 15

Danielle, the regional manager of CDz music store, is trying to determine if the store should invest in a new computerized inventory tracking system. Using financial analysis, she would decide that the investment was desirable in which of the following situations?

Accepted Answer

NPV (Net Present Value) is a financial analysis method that takes into account the time value of money, and it is used to determine the profitability of an investment. A positive NPV indicates that the investment is expected to generate more cash flows than the cost of capital, resulting in a net gain for the firm. Therefore, choice B is the best answer. Choice A is incorrect because it only considers the cash flows without taking into account the timing of those cash flows. Choice C is incorrect because having enough cash to make the purchase does not necessarily mean that the investment is profitable. Choice D is incorrect because a negative NPV indicates that the investment is expected to generate less cash flows than the cost of capital, resulting in a net loss for the firm.

Question 16

Alison has $5000 to invest and is trying to decide between two investment opportunities. One investment offers her future cash flows of $2000 for each of the next five years. Another investment offers her future cash flows of $5000 in year five and $7500 in year six. In order for her to compare the future cash flows of these two investments, what will she need to calculate?

Accepted Answer

Alison will need to calculate the present value of both investment opportunities in order to compare their future cash flows. This will allow her to determine which investment is worth more in today's dollars and make an informed decision. Therefore, the correct answer is D, present value. The other options (annuity value, average annual payout, and common payout value) are not relevant for comparing the future cash flows of these two investments.

Question 17

Which of the following proposals would be considered under capital budgeting?

Accepted Answer

Capital budgeting typically involves decisions related to new investments in long-term assets or projects with significant financial implications, such as new product lines. Introducing a new product line would require significant capital investment, making it a suitable candidate for capital budgeting considerations.

Question 18

Which type of budgeting would investing in fixed assets be classified as?

Accepted Answer

Investing in fixed assets falls under the category of capital budgeting, which involves making long-term investment decisions in fixed assets such as property, plant, and equipment (PP&E). Operating budgeting pertains to short-term budgeting decisions related to day-to-day operations, while master budgeting involves creating a comprehensive budget for the entire organization, and working capital budgeting pertains to budgeting for short-term cash flow and liquidity needs.

Question 19

What is the main goal of financial management? What considerations regarding diverse stakeholders do financial managers need to make when taking actions toward this goal? Provide an example. Explain your answer.

Accepted Answer

The answer of What is the main goal of financial...

Question 20

Jason, the regional manager for a large electronics firm, is trying to determine whether a new warehouse is a good investment. After working with his firm's financial managers, he concludes that the project carries a negative net present value. What should Jason do-and why?

Accepted Answer

A negative net present value means that the present value of future cash flows from the investment is less than the cost of the investment. Therefore, the costs of the warehouse are not justified by the expected cash flows. Hence, Jason should not invest in the warehouse.

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