Missed Concepts Flashcards
Which security best allows an issuing company to obtain additional funding while keeping debt costs low?
A. Depositary Receipts
B. Preferred Stock
C. Convertibles
D. Warrants
D.
Key phrases here include:
**additional funding
**keeping debt costs low
Issuing preferred stock is similar to issuing debt, so it’s not the best answer
Warrants have the ability to bring additional funds into a company while keeping debt costs low
What did the Financial Stability Board (FSB) publish proposals for in October 2021?
Enhance money market fund resilience
Factoring vs. Securitization
Securitization is for bundling obligations for investors, rather than a factor
Factored A/R is often sold at a steep discount
Financial Statements are used by the board and executive leadership to accomplish which of the following?
A. Assess creditworthiness B. Assess performance against loan covenants C. Reward staff D. Determine whether or not to invest
C - Reward staff
Lenders, creditors and investors usually pay additional attention to which of the following financial statements?
A.Statement of cash flows B.Balance sheet C.Statement of retained earnings D.Income statement
A - Statement of cash flows
A subsidiary of a US company based in China keeps its books in the Chinese renminbi and does the majority of its business in the Chinese renminbi (RMB). The home currency is the US dollar (USD). According to IAS 21: The Effects of Changes in FX Rates, during the step where one translates foreign currency financial statements into the functional currency, non-monetary items that are reported at historical cost in RMB ______________.
A.Are translated into USD using the exchange rate on the transaction date B.Do not need to be translated in this step as they are already in the functional currency C.Are translated into USD using the closing exchange rate D.Are translated into USD using the exchange rate as of the date of the fair value measurement
B - Do not need to be translated in this step as they are already in the functional currency
Which of the following uses of cash would not allow the time value of money to be effective?
A.Investing in equipment that will have 100% idle capacity B.Repaying debts C.Investing in short-term commercial paper D.Selling zero coupon bonds
A - Investing in equipment that will have 100% idle capacity
A firm’s weighted average cost of capital is 7%, it has achieved a return on total assets of 6% and net income of $400,000. The company also has positive cash flow. Which of the following is the MOST LIKELY result of this scenario?
A.The firm is creating only a small amount of value for investors, so the stock price will likely not be affected by the results either way B.The firm has seen mixed success and the stock price will likely stay the same C.The firm is successful by all measurements given and the stock price will likely rise D.The firm is destroying some of the stock's value and the stock price will likely fall
D - Even with net income and positive cash flow, the stock price will decrease
What responsibility do treasury professionals typically have in regards to budgets?
A.Treasury professionals use budgets primarily for planning and variance analysis B.Treasury professionals need to assess the impact budgets have on debt covenants but not credit ratings C.Treasury professionals use budgets as an input to their work but are not responsible for the budgeting process D.Budgets may require treasury professionals to change how they handle short-term assets to maintain overall liquidity
D - Treasury assess for impacts on debt covenants and credit ratings
Which of the following statements is true regarding free cash flow (FCF)?
A.It is not considered a fundamental component of assessing firm value B.It must be a positive number for it to be interpreted positively by investors C.It indicates how much cash generated during the period is available to shareholders and creditors D.It adjusts net income for cash charges, working capital and capital expenditures
C - FCF is for shareholders and all creditors
Labor is the greatest variable cost for a particular business. Equipment is the greatest fixed cost for the business. Which of the following should the business do if they wish their profits to expand more rapidly, assuming the company is currently profitable? What will happen to the break-even level of output for the business if they make the change?
1. A.Invest in labor to reduce equipment costs; the break-even level will increase
2. B.Invest in equipment to reduce labor costs; the break-even level will decrease
3. C.Invest in labor to reduce equipment costs; the break-even level will decrease
4. D.Invest in equipment to reduce labor costs; the break-even level will increase
D - Profits will expand more rapidly using fixed costs once those costs have been covered. As the company is already profitable, investing in more fixed costs will create a higher level of profitability.
A firm has increased its return on assets (ROA) from the prior period. The firm’s return on sales increased significantly and its total asset turnover decreased a fair amount over the period. Which of the following is the correct conclusion from these results?
1. A.The firm should look for areas where their investment in assets could be reduced to increase measures such as cash turnover
2. B.All of the ratios mentioned show that both efficiency and effectiveness have increased regarding cost control and asset usage
3. C.The firm should increase control over operating costs by increasing its investment in fixed assets relative to current assets
4. D.The firm should focus on measures such as gross and operating profit margin as a means to increase total asset turnover
A
ROA measures net income in relation to the investment in assets. A greater value for this ratio implies a larger net income generated per dollar invested in assets.
The net profit margin, also known as return on sales, shows the percentage of profits earned after all expenses and taxes are deducted from revenues.
Total asset turnover measures how many times the firm’s asset base was used or turned over while generating the period’s revenue. This is a measure of how effectively assets are used to generate revenue. If total asset turnover was too low, then the firm had more investment in assets than a well-managed firm needed to support the experienced revenues.
To optimize float, a company who is investing heavily in just-in-time and supply chain management would disburse and collect in which of the following ways?
1. A.Use electronic payments, invoices, and collections
2. B.Disburse via check; collect via electronic invoices and ACH
3. C.Disburse via wire; collect via paper invoices and ACH
4. D.Disburse and collect using checks and paper invoices
A - Traditionally, the rule in cash management has been to collect quickly and disburse slowly, within the constraints of prudent business practices and the maintenance of good relations with trading partners and other stakeholders. Suppliers have an incentive to engage in actions that minimize the company’s payment float, while customers try to maximize the company’s collection float. The introduction of electronic payment systems, including commercial cards, has changed the relative incentives to an extent because the efficiency and benefits of the new payment methods (including the reduction in processing costs) outweigh the benefits of delaying paper-based payments, resulting in quicker disbursements.
Why is careful management of borrowing and investing during the cash cycle critical to a company’s short-term liquidity and long-term viability?
1. A.Investing generates sufficient inventory cushions and borrowing compensates for accounts receivable delays
2. B.The cycle of purchasing, building, selling and collecting is predictable but has inherent time lag
3. C.While the cash flow cycle is often stable, it cannot grow without continual capital investments
4. D.Cash flow is often uneven for individual accounts and overall working capital
D - Many current asset and current liability accounts vary whenever sales activity occurs. These accounts are called spontaneous because no specific working capital management decisions are involved in increasing these accounts. Changes in account levels occur as account activity fluctuates with a change in the level of sales activity. The magnitude of spontaneous changes significantly impacts the amount of external financing necessary for working capital.
