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Test answers for Financial Analysis 2016

(79) Last updated: January 23
Elance • Fin. & Mgt.
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79 Answered Test Questions:

1. Assets that that can be converted into cash quickly are considered:


• Illiquid

• Lucid

• Liquid

• Tangible and fixed

2. The term "fund" as in Mutual Fund suggests


• Intermingling of multiple investors money in a single vehicle

• A large company responsible for investing for the 'Mutual' benefit of investors

• An investment vehicle only for stocks

• An investment vehicle primarily for investing outside of the investor's domestic country

3. True or False? Depreciation is not affected by how an asset purchase is financed.


• True

• False

4. In the US most companies follow which accounting standard?






5. Fiduciary duty effectively requires all financial organizations and people to act in the best interests of their client


• True


6. What is the difference between APR and EAR?


• APR is annual rate and EAR is effective rate after compounding

• APR and EAR are same

• APR is greater than EAR

• EAR is the rate typically mentioned on loan

7. What is Arbitrage?


• Buying something of value and the selling it for a higher price at another Exchange

• Buying stock options.

8. True or False The purpose of auditing financial statements is to form a view that the information presented is an accurate general view of the financial situation of a company at a given date.


• True


9. What is capital?


• Paper money.

• Any assets ready to be used in the production of new assets .

• Dividend.

10. Which technique is used to find volume of sales at which a company just covers the total cost?


• Target-Profit analysis

• Breakeven-point analysis

• Profit-Sensitivity analysis

• Activity based cost analysis

11. What is a Buy Back?


• Buying back of stocks or bonds by the issuing company.

• Initial Public Offering

• Issuing new company shares

12. What are the three financial statements that are used for business analysis?


• Balance sheets

• Income statement

• Cash flow statements

• All of these

13. True or False: Projections and Simulators (Monte Carlo etc) are only as good as their assumptions


• True


14. What do you call the discount rate that equates the cash inflows and cash outflows of an investment project, resulting in a net present value of zero?


• Investment value

• Historical rate principle

• Going-concern rate

• Internal Rate of Return

15. Basic principle for  Financial Analysis


• Make decisions regarding investing or lending capital by the board of directors

• The process of evaluating businesses, projects, budgets and other finance-related entities

• Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in.Continue or discontinue its main operation or part of its business

• Its is a key factor to determine their suitability for investment.

• The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough t

16. What does the Beta Coefficient of a stock indicate?


• Company's growth factor

• A stock???s volatility in relation to the overall market

• Stock's growth factor

• Stock's dividend

17. Which of the following is an example of fixed income security?


• Mutual Funds

• Equity

• Bonds

18. __________ of the cash flow generated by the firm's operations, investments and financial activities.


• the auditor's statement of financial condition

• The statement of cash flows is a report

• None of the above is a report

• The income statement is a report

• The balance sheet is a report

19. __________ of the profitability of the firm over a period of time such as a year


• The balance sheet is a summary

• None of the above is a summary

• The income statement is a summary

• The audit report is a summary

• That statement of cash flows is a summary

20. Ratio Interpretation :  High EPS , high book value & high Dividend pay out per share represents


• Its not a BLUECHIP company

• company share / stock price will not good investment

• Good company grows in better both - eligible Investment & Investor friendly

• Companies growth in worst poth

• Its a conservative company & not advisable for investments

21. The recorded value of the shareholders equity on the balance sheet reflects:


• Operational cash flow

• Net profit

• Net worth

• Gross profit

22. The interest on government bonds (treasuries, t-bills etc) are typically considered:


• Overnight lending rate for large banks.

• Cost of capital for large corporations

• Risk free lending rate

• Cost of doing business with the government

23. What is net working capital?


• Current assets - current liabilities

• Total assets - total liabilities

• Cash - debt

• Total assets - current assets

24. Company A is incorporated in the US and operates in the US only. Calculate the corporate tax on EBT of $57,000 for 2012, assuming no tax reduction practices and 40% tax rate.


• $14,250

• $22,800

• $8,550

• $11,400

25. What is a bond?


• Paper money.

• A security for a loan.

• A certificate of debt.

26. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company


• will be viewed as having high creditworthiness.

• will not experience any difficulty with its creditors.

• has greater than average financial risk when compared to other firms in its industry.

• has less liquidity than other firms in the industry.

27. The process of testing the impact on the results of an analysis from changes of one or more of the input variables is called:


• An A/B analysis

• A sensitivity analysis

• A blanket analysis

• A sequential analysis

28. The accounting term for a company to continue functioning into the foreseeable future is


• Durability

• Comparability

• Going Concern

• Liveliness

29. True or False? At the half-way time of mortgage period, the remaining balance is half of the original loan amount.


• False

• True

30. Among other responsibilities The Federal Reserve is the lender of last resort


• True


31. How does Capital Asset Pricing Model (CAPM) help?


• It attempts to explain how stock prices are set in the market

• It exactly shows stock price for a later date

• It attempts to explain company's revenue

• It attempts to explain company's profit margin

32. If a company faces a 15% increase in production while production costs increase 35% it is most likely experiencing:


• Diseconomies of Scale

• Economies of Scale

• Economies of Scope

• Returns to Market

33. __________ a snapshot of the financial condition of the firm at a particular time.


• The income statement provides

• The statement of cash flows provides

• None of the above provides

• All of the above provide

• The balance sheet provides

34. An "acid test" measures the ability of a company to use its ______ to extinguish or retire its current liabilities immediately.


• credit

• bonds

• net sales

• near cash

35. What is a leveraged buyout?


• The acquisition of a business by investors using a high percentage of debt carried by the business itself

• An acquisition of a business in which the purchasing company becomes a subsidiary of the purchased company

• Two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits

36. What does a Bear Market mean?


• A market characterized by falling prices for securities.

• Volatile market.

• A market characterized by rising prices for securities.

37. The cash conversion cycle (CCC) measures


• how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth

• how long a firm will be deprived of cash if it decreases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth

38. A creditor whose claim is specifically designed as ranking below the claims of other creditors in the company is called a:


• Lower creditor

• Stock creditor

• Subordinate creditor

• Safe creditor

39. True or False? Retained earnings are largely the same as paid-in capital


• True

• False

40. In the case of conflict, why is the NPV method preferred over IRR?


• NPV is the robust formula for capital budgeting

• IRR is not always a reliable method especially with a mixture of positive and negative cash flows.

• NPV has more probability of indicating to undertake a project

• NPV has a more simple assumption for the discount rate

41. Which costing method allocates overhead cost to a product using activities required to produce the product?


• Volume based costing

• Unit level costing

• Activity based costing

• Product costing

42. Which of the following is not a quality of accounting information?


• Reliability

• None of the Above

• Relevance

• Consistency

43. What is a corporation's taxable income?



• Revenue



44. A bond covenant is a:


• Contract outlining rights and responsibilities of the involved parties

• Term describing asymmetric risks/returns of bonds

• Another term for coupon

• Person responsible for administering the bonds coupons and principle payment

45. Banks relative to most other types of companies are more likely to have more


• Current Assets

• Shareholders

• Fixed Assets

• Taxes

46. What is an equity security that has some of the characteristics of debt?


• Preferred Stock

• Treasury

• Common Stock

• Private Placement Bond

• Bank Loan

47. The appropriate objective of an enterprise is


• Maximisation of revenue

• Maximisation of profits.

• None of these.

• Maximisation of owners wealth

• Maximisation of sale

48. Regarding dividend payments: common stock and preferred stock differ in which way most importantly?


• Size of dividends

• Timing of dividends

• Seniority of dividends

• Quantity of dividends

49. What is the other name for Earnings before interest and taxes?


• Gross Earnings

• Operating Profit

• Revenue

• Net Income

50. Which process shows an internal detailed plan of the use of financial and operating resources over a specific period of time?


• Planning

• Financial statements

• Profit & Loss statements

• Budgeting

51. True or False? Equity is historically much riskier than debt.


• True

• False

52. The minimum rate of return that capital investment projects have to meet, usually based on the cost of capital, is known as the:


• Cutoff rate

• Debt ceiling

• Sale rate

• Debt to asset ratio

53. Why is cost allocation necessary?


• Finding indirect cost is the ultimate goal

• Different products or services often share common resources

• Different products or services can not share common resources

• There are always dedicated resources for business activities

54. The standard model for valuing a company based on it's dividends is called?


• Dividend Valuation Technique

• Dividend Discount Model

• Dividend NPV

• Stakeholder Dividend Model

55. The efficient market hypothesis is true in all cases



• False

• It has never been properly tested

56. When creating projections over a long period of time it is important to assume


• Growth rates will stabilize

• Interest rates will increase impacting cash flow

• Management will change impacting the projects longevity

• Taxes will increase substantially

57. Which one of the following best describes the Cost of Capital?


• An average number of shares held by its investors

• The required return on a company's outstanding securities

• The cost of repaying company debts

• The cost of buying fixed assets

58. Which valuation method is suitable to use when a company's leverage structure is constantly changing over time?


• Discounted Cash flow

• Adjusted Present Value

• Dividend Discount model

• WACC or Cost of Capital

59. Which valuation method is suitable to use when a company's leverage structure is constantly changing over time?


• Adjusted Present Value

• WACC or Cost of Capital

• Dividend Discount model

• Discounted Cash flow

60. When valuing a start-up with limited funding these types of ratios are most important


• Efficiency

• Liquidity

• Leverage

• Business

61. Accounting Profit and Economic Profit differ most in their attention to:


• Opportunity Cost

• Depreciation

• Interest Rates

• Future Value

62. When comparing mutually exclusive projects to undertake which methodology is most appropriate?



• Payback Period



63. What is the main financial disadvantage of a C-Corp?


• Complex structure to set up

• Not easy to get loan

• Requires personal guarantees

• Double taxation on earnings

64. A method to represent an unknown variable in a financial plan is known as a:


• Option

• Operator

• Plug

• Principal

65. A firm faces leverage both explicitly and implicitly.  Which of the following is a type of leverage?


• Government intervention on behalf of the firm

• Hiring smart people and 'leveraging' their talents

• Purchases of expensive equipment for production

• Close proximity to customers

66. Which of the following best describes period expense?


• Cost of labor and raw material activities

• Cost of selling and raw material

• Cost of raw material and admin activities

• Cost of selling and admin activities

67. True or False: It is the job of auditors to comment on the capabilities of management and governance


• True

• False

68. Which of these is an example of an amortized bond?


• Zero Coupon Bond

• 30 Year Mortgage

• Semi Annual Corporate Bond

• Treasury

69. A company has a high quality of earnings, when it has ....


• High operational leverage

• High cash flow in comparison with reported net income

• High net profit margin

• High return on average assets

70. What does  the market risk premium indicate?


• It is the risk free rate of return

• Degree of risk aversion felt by investor

• It is the market's rate of return

• A very general market risk factor

71. What is the relative measure of variation in Risk Theory?


• Variance

• Standard Variation

• Mean/Standard Deviation

• Coefficient of Variation

72. In the American tax system, what is total Effective Tax Rate (TETR)? (Tf=federal tax, Ts=state tax)


• Tf+Ts(1-Ts)

• Tf+Ts(1-Tf)

• Ts+Tf(1-Tf)

• Ts+Tf(1-Ts)

73. True or False? APR is always less than or equal to EAR.


• True

• False

74. What type of asset is 'Stock' classified as?


• Investment assets

• Financial assets

• Security assets

• Real assets

75. Which of the following indicates off-balance-sheet activities of a bank?


• Loan sales

• Generating cash

• Issuing loan

• Credit check of prospective borrowers

76. When discussing the NPV of a start-up company in addition to considering the cost of capital its important to consider this concept to properly discount cash flows?


• Likelihood of failure

• Location

• The expected return from stock market

• Required Return

77. When using NPV the discount rate should take into account:


• The risk of the relative project

• Current rate of inflation

• The WACC (Weighted Average Cost of Capital) of the company

• Interest rates paid by the company on it's bonds

78. B&A Company has an EBIT of $20 million and faces a tax rate of 40% and an interest rate of 6%.  What are B&A's Earnings?


• At least $12 million

• $12 million

• $10.8 million

• $13.2 million

79. Under U.S GAAP, where is the dividend received so it will be presented in the cash flow statement?


• Investing activities

• Operating activities

• Financing activities