Financial Management

Question 1

Forumla for average A/R balance

Answer 1

Credit sales per day x Avg collection period

Question 2

Formula for relative risk/coefficient of variation

Answer 2

Standard deviation / Expected returns

Question 3

Which risk only utilizes equity financing?

Answer 3

Business risk

Question 4

Describe premium bond

Answer 4

Market rate of return < Stated coupon rate

Question 5

Describe discount bond

Answer 5

Market rate of return > Stated coupon rate

Question 6

Formula for CAPM

Answer 6

• Risk free Rate + (Beta x Market Risk Premium)
• Risk free Rate + {Beta (Market Return - Risk free Rate)}

Question 7

Formula for IRR

Answer 7

PV of Cash Outflows = PV of Cash Inflows

Question 8

Reason why depreciation is used in NPV

Answer 8

Depreciation increases cash flow by reducing income taxes

Question 9

What types of bonds maintain a constant market value?

Answer 9

Floating-rate Bond

Question 10

Disadvantages of IRR

Answer 10

• Limitations when evaluating mutually exclusive investments
• Uneven cash flows lead to varied IRR

Question 11

Treatment of depreciation & salvage value in NPV

Answer 11

• Depreciation: Exclude
• Salvage Value: Include as cash inflows

Question 12

Relationship between risk & return

Answer 12

Direct relationship

Question 13

Formula for cost of carrying inventory

Answer 13

Avg Inv Level x Unit Cost x Cost of capital

Question 14

Under NPV, the project’s cash flows are reinvested at the

Answer 14

Discount rate a.k.a cost of capital

Question 15

Describe discount rate used in NPV

Answer 15

Minimum rate of return required

Question 16

Which factor explains the difference between real & nominal interest rate?

Answer 16

Inflation risk

Question 17

Advantage of zero-coupon bonds

Answer 17

Increase in value each year as they approach maturity

Question 18

Describe the PV of annuity due

Answer 18

Series of equal payments due @ the beginning of the period

Question 19

Describe the PV of ordinary annuity

Answer 19

Series of equal payments due @ the end of each peirod

Question 20

When the IRR is higher?

Answer 20

• Increase/Earlier in cash inflows
• Decrease/Later in cash outflows

Question 21

When the IRR is lower?

Answer 21

• Decrease tax credits on assets
• Rec’d cash inflows later

Question 22

Downward-sloping yield curve in term of interest rate implies that

Answer 22

Short-term interest rates are higher than long-term interest rate

Question 23

Theory underlying the cost of capital is primary concerned with the cost of

Answer 23

Long-term funds & new funds

Question 24

What’s serial bonds

Answer 24

Bond issues that mature in installments

Question 25

What’s term bonds

Answer 25

Bond issues that mature on a single date

Question 26

Formula for spread

Answer 26

ROI - Cost of capital

Question 27

Which technique is NOT for considering the risk of an investment?

Answer 27

Internal rate of return

Question 28

Describe secured bond

Answer 28

Provides bondholders with a pledge against certain assets

Question 29

Formula for profitability index

Answer 29

PV of ‘after’ tax cash inflow / Initial Inv

Question 30

Relationship between NPV & firm value

Answer 30

• Direct
• • NPV, ↑ firm value
• • NPV, ↓ firm value

Question 31

Formula for reward/risk ratio

Answer 31

Rate of Return / Standard Deviation

Question 32

Formula of current yield on a bond

Answer 32

Interest Paid / Bond Market Price

Question 33

Formula of the degree of operating leverage

Answer 33

% △ in EBIT / % △ in Sales Volume

Question 34

Formula of the degree of financial leverage

Answer 34

% △ in Earnings per Share / % △ in EBIT