A Test On Finance Concepts! Trivia Quiz

The annual estimated costs of assets used up every year includes depreciation and amortization. Depreciation refers to the decrease in value of tangible assets over time due to wear and tear or obsolescence. Amortization, on the other hand, refers to the gradual reduction of the value of intangible assets, such as patents or copyrights, over a specific period. Both depreciation and amortization are important in determining the true cost of using assets and are included in the annual estimated costs. Net sales, net profit, and net cost are not directly related to the annual estimated costs of assets used up.

Annual compounding refers to the practice of calculating interest on an investment or loan once a year. In this method, interest is added to the principal amount at the end of each year and then the interest is calculated on the new total for the following year. This allows for the interest to compound or accumulate over time. The other options, such as semiannual or monthly compounding, involve calculating interest more frequently throughout the year, resulting in a higher overall interest amount.

Capital rationing refers to the situation where a firm restricts its spending on capital projects due to limited financial resources. This can occur when a company has a limited budget, insufficient funds, or when management wants to prioritize certain projects over others. By implementing capital rationing, the firm aims to allocate its available capital to the most profitable and valuable projects, ensuring optimal utilization of resources.

The price per share divided by earnings per share is the formula to calculate the price earning ratio. This ratio is used by investors to assess the relative value of a company's stock by comparing its market price to its earnings. A higher price earning ratio indicates that investors are willing to pay a higher price for each unit of earnings, suggesting that the stock may be overvalued. Conversely, a lower price earning ratio suggests that the stock may be undervalued. Therefore, the correct answer is price earning ratio.

The future value can be calculated using the formula: FV = PV * (1 + r)^n, where PV is the present value, r is the interest rate, and n is the number of periods. In this case, the present value is Rs.100, the interest rate is 5% (or 0.05), and the number of periods is 3. Plugging these values into the formula, we get FV = 100 * (1 + 0.05)^3 = 100 * 1.157625 = 115.76. Therefore, the future value is Rs.115.76.

A positive net present value (NPV) indicates that the project's cash flows are greater than the capital invested for the rate of return. This means that the project is generating more cash inflows than the initial investment, resulting in a positive return on investment. A positive NPV is generally considered favorable as it signifies that the project is profitable and adds value to the company or investor.

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The return on equity is calculated by multiplying the return on assets by the equity multiplier. In this case, the return on assets is 6.7% and the equity multiplier is 2.5. Multiplying these two values gives us 16.75%, which is the return on equity.

Benchmarking is the process of comparing a company's performance, processes, or products with those of other leading firms in the industry. It involves identifying best practices and performance standards in order to improve performance and achieve competitive advantage. By benchmarking, companies can gain insights into their strengths and weaknesses and identify areas for improvement. This helps them set goals, make informed decisions, and enhance overall performance.

Capital budgeting is the correct answer because it refers to the process of evaluating and selecting long-term investment projects that will add value to the company. This process involves analyzing the potential returns and risks associated with different projects and determining which ones are worth pursuing. It helps the managers allocate the company's financial resources effectively and make informed decisions about investing in projects that will generate the highest returns for the business.

In mutually exclusive projects, the project that is selected over others must have a higher net present value. Net present value (NPV) is a financial metric used to determine the profitability of an investment by comparing the present value of its cash inflows to the present value of its cash outflows. A higher NPV indicates that the project's cash inflows are greater than its cash outflows, resulting in a more profitable investment. Therefore, in order to maximize returns and make the best investment decision, the project with the highest NPV should be chosen.

The formula net income available to common stockholders divided by common equity is used to calculate return on common equity. This ratio measures the profitability and efficiency of a company in generating profits from the common equity invested by its shareholders. By dividing the net income by the common equity, it provides insight into how effectively the company is utilizing its equity to generate earnings for its common shareholders.

The equity multiplier is calculated by dividing total assets by common equity. This ratio measures the amount of assets that are financed by equity compared to debt. A higher equity multiplier indicates a higher level of debt financing, while a lower equity multiplier indicates a higher level of equity financing. Therefore, the formula used to calculate the equity multiplier is the total assets divided by common equity.

An amortized loan is a type of loan where the borrower makes equal payments on a monthly, quarterly, or annual basis to repay the loan. The payments are structured in a way that both the principal amount and the interest are gradually paid off over the loan term. This ensures that the loan is fully repaid by the end of the term. Therefore, an amortized loan is the correct classification for a loan that is repaid in equal payments on a regular basis.

Common size analysis is a technique used in comparative analysis of financial statements. It involves converting the financial data into percentages, allowing for easier comparison between different companies or different periods of the same company. By expressing each item as a percentage of a base amount, such as total assets or total sales, common size analysis helps identify trends and patterns in the financial statements. This technique is particularly useful in identifying changes in the composition of a company's assets, liabilities, and income over time, and in comparing the financial performance of different companies within the same industry.

The cost of capital is equal to the required return rate on equity for common stockholders because they are the primary owners of a company and bear the highest risk. Common stockholders invest their capital in the company and expect a certain return on their investment. The cost of capital represents the minimum return rate that a company needs to earn on its investments to satisfy its common stockholders. This rate takes into account the risk associated with the investment and reflects the opportunity cost of investing in the company rather than in alternative investments with similar risk profiles.

The return on assets (ROA) is calculated by multiplying the profit margin and the total assets turnover. In this case, the profit margin is 4.5% and the total assets turnover is 1.8%. Multiplying these two values gives us 0.045 * 0.018 = 0.00081, which is equivalent to 0.081%. Therefore, the return on assets as per the DuPont equation is 8.10%.

The internal rate of return is the correct answer because it refers to the rate of return that an investment provides to its investor. It is a measure used to evaluate the profitability of an investment by calculating the discount rate that makes the net present value of the investment's cash flows equal to zero. This rate takes into account the timing and amount of cash flows generated by the investment, providing a more accurate measure of its return compared to other options listed.

In equilibrium, interest rate parity states that the spread between foreign and domestic rates of interest must be equal to the spread between forward and spot exchange rates. This means that if there is a higher interest rate in the foreign country compared to the domestic country, the forward exchange rate should be higher than the spot exchange rate to compensate for the difference in interest rates. Conversely, if the interest rate in the domestic country is higher, the forward exchange rate should be lower than the spot exchange rate. This ensures that there are no arbitrage opportunities in the foreign exchange market.

The DuPont equation is a financial formula that calculates return on equity (ROE) by multiplying the profit margin with the total asset turnover. This equation allows analysts and investors to assess the profitability and efficiency of a company. By multiplying total assets with profit margin, the DuPont equation highlights the relationship between a company's profitability and its use of assets.

The formula provided, net income available to common stockholders divided by total assets, is used to calculate the return on total assets. This ratio measures how efficiently a company is utilizing its assets to generate profit for its common stockholders. By dividing the net income by the total assets, it gives an indication of the profitability of the company's investments and operations.

The price to cash flow ratio is calculated by dividing the price per share by the cash flow per share. This ratio is used to evaluate the valuation of a company's stock by comparing the market price of the stock to the cash flow generated by the company. It helps investors determine if a stock is overvalued or undervalued based on its cash flow generation. A higher ratio suggests that the stock may be overvalued, while a lower ratio indicates potential undervaluation.

Benchmark companies are the ones that help set benchmarks. These companies are known for their expertise in establishing industry standards and best practices. They conduct thorough research and analysis to determine the key performance indicators and metrics that other companies can use as a benchmark for measuring their own performance. By setting benchmarks, these companies provide a reference point for others to compare and improve their own performance.

The equity multiplier is a financial ratio that measures the amount of debt used to finance a company's assets. It is calculated by dividing total assets by total equity. Return on assets (ROA) is a profitability ratio that measures how efficiently a company is using its assets to generate profit. By multiplying the equity multiplier with ROA, we can calculate the return on assets. This helps in understanding the overall profitability of the company and the impact of debt on its profitability.

The return on total assets is calculated by dividing the net income available to stockholders by the total assets and then multiplying by 100 to get a percentage. In this case, the net income available to stockholders is Rs.150 and the total assets are Rs.2,100. Dividing Rs.150 by Rs.2,100 gives a decimal value of 0.0714. Multiplying this by 100 gives a percentage of 7.14%. Therefore, the correct answer is 7.14%.

The price earning ratio and price by cashflow ratio are classified as market value ratios because they provide information about the market value of a company's stock. The price earning ratio compares the price per share to the earnings per share, indicating how much investors are willing to pay for each dollar of earnings. The price by cashflow ratio compares the price per share to the cash flow per share, showing how much investors are willing to pay for each dollar of cash flow. Both ratios help investors assess the market value of a company's stock relative to its earnings and cash flow.

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The current market risk premium can be calculated by subtracting the risk-free rate (T-bond rate) from the expected return on common stock. In this case, the difference between 14% (expected return on common stock) and 5% (T-bond rate) is 9%. Therefore, the current market risk premium is 9%.

The growth retention model calculates the growth rate of a company by multiplying the retention ratio (the portion of earnings that is reinvested) by the return on equity (the profitability of the company's investments). In this case, with a retention ratio of 0.60 and a return on equity of 15.5%, the growth retention model would be 0.60 * 15.5% = 9.30%. This means that the company is expected to grow at a rate of 9.30% based on its reinvestment of earnings and profitability.

Common Size & Percentage Analysis is a technique used to identify financial statement trends. Common size analysis involves expressing each item on the financial statement as a percentage of a base value, such as total assets or net sales. This allows for easy comparison between different periods and companies. Percentage analysis, on the other hand, involves calculating the percentage change in specific items or ratios over time. Both techniques help in identifying trends and patterns in financial statements, making it easier to analyze and interpret the data.

The correct answer is the discounted cash flow method. This method is used to estimate the cost of equity by discounting the expected future cash flows of a company to their present value. It takes into account the time value of money, as it recognizes that a dollar received in the future is worth less than a dollar received today. By discounting the future cash flows, the method provides a more accurate estimation of the cost of equity for investors.

The price to cash flow ratio is calculated by dividing the price per share by the cash flow per share. In this case, the price per share is Rs. 25 and the cash flow per share is Rs. 6. Dividing 25 by 6 gives us approximately 4.16, so the price to cash flow ratio is 4.16 times.

A high price to earning ratio indicates that investors are willing to pay a premium for the company's earnings, suggesting that they have high expectations for future growth. This implies that the company is expected to experience significant growth in its earnings in the future, making it an attractive investment option. Therefore, the correct answer is "high growth prospect."

The correct answer is "Policy of Capital Structure, Dividends & Investments". In the weighted average cost of capital (WACC) calculation, the company can affect its capital cost by making decisions related to its capital structure, dividends, and investments. The capital structure refers to the mix of debt and equity financing used by the company, and by adjusting this mix, the company can impact its cost of capital. Dividends also play a role as they affect the amount of funds available for investment and can impact the company's overall cost of capital. Additionally, the company's investment decisions can impact the risk profile of the company, which in turn affects the cost of capital.

Beta risk refers to the risk associated with a specific investment or project in relation to the overall market. It measures the volatility or sensitivity of the investment's returns compared to the market as a whole. A well-diversified stockholder considers beta risk when assessing the risk associated with a project. This is because beta risk helps them understand how the project's returns may fluctuate in relation to the overall market movements. By considering beta risk, the stockholder can make informed decisions about the level of risk they are willing to take on and how it may impact their investment portfolio.

Jensen's alpha is the correct answer because it refers to the intercept of excess returns in the regression of the capital asset pricing model. Jensen's alpha measures the risk-adjusted performance of an investment by comparing the actual return with the expected return based on the systematic risk of the investment. It indicates whether the investment outperformed or underperformed the market, considering the level of risk involved.

The return on assets is calculated by multiplying the profit margin, assets turnover, and equity multiplier. In this case, the profit margin is 4.5%, the assets turnover is 2.2 times, and the equity multiplier is 2.7 times. Multiplying these values together, we get 0.045 * 2.2 * 2.7 = 0.2673, which is equal to 26.73%. Therefore, the correct answer is 26.73%.

An open position refers to a non-hedged position in foreign exchange, where a trader has bought or sold a specific currency but has not yet closed the trade. It means that the trader is still exposed to potential gains or losses from fluctuations in the exchange rate. This term is used to describe a situation where the trader has not yet taken any action to offset or close their position in the market.

The theory of interest rate parity states that the difference between the expected appreciation of a foreign currency and the foreign interest rate must be equal to the domestic interest rate. This means that if the expected appreciation of a foreign currency is higher than the foreign interest rate, then the domestic interest rate must be higher as well. This theory helps to explain the relationship between interest rates and exchange rates in international finance.

Market value ratios are ratios that relate a firm's stock to its market value. These ratios provide information about the market's perception of the firm's value and its ability to generate returns for shareholders. Examples of market value ratios include the price-to-earnings ratio (P/E ratio), price-to-book ratio (P/B ratio), and market-to-sales ratio (M/S ratio). These ratios are important for investors and analysts as they help in assessing the attractiveness of a company's stock and its potential for growth.

The process of calculating future value of money from the present value is classified as compounding. Compounding refers to the concept of earning interest or returns on both the initial amount of money and the accumulated interest or returns over time. It involves reinvesting the earnings, which leads to exponential growth of the investment. This is commonly used in various financial calculations, such as determining the future value of an investment or the final amount of a loan after interest has been applied.

The correct answer is 4.14%. To calculate the interest rate, we can use the formula for present value: PV = FV / (1 + I)^n, where PV is the present value, FV is the future value, I is the interest rate, and n is the number of years. Plugging in the given values, we get 100 = 150 / (1 + I)^10. Solving for I, we find that I is approximately 4.14%.

The profit margin, assets turnover, and equity multiplier are all financial ratios used to calculate different aspects of a company's performance. When multiplied together, they help calculate the return on equity, which measures the profitability of a company's shareholders' investments. This ratio indicates how efficiently a company is generating profits from the equity invested by its shareholders. A higher return on equity signifies better performance and profitability for the company.

Economic Value Added (EVA) and Net Present Value (NPV) have a direct relationship. This means that as EVA increases, NPV also increases, and vice versa. EVA measures the value created by a company by subtracting the cost of capital from its net operating profit after tax. NPV, on the other hand, calculates the present value of future cash flows by discounting them to the present using a required rate of return. Since both EVA and NPV are measures of value creation, they are positively correlated, indicating a direct relationship between them.

The correct answer is high return on assets. This is because when a company has low earning power and high interest costs, it indicates that the company is struggling to generate profits and is burdened with significant financial expenses. In such a scenario, the return on assets, which is a measure of how efficiently a company utilizes its assets to generate profits, is likely to be high. This is because the company's assets are not generating substantial earnings, resulting in a higher return on assets ratio.

The bond yield can be calculated by adding the cost of common stock and the bond risk premium. In this case, the cost of common stock is 14% and the bond risk premium is 9%. Adding these two percentages gives us a total of 23%. Therefore, the bond yield is 23%.

In the calculation of time value of money, the 'PMT' represents the payment made at regular intervals. It could be a monthly or annual payment made towards a loan, lease, or investment. The PMT is an essential component in calculating the present value or future value of money, as it represents the cash flow that occurs over a specific period of time.

The cost of common stock can be calculated using the dividend discount model (DDM) formula. The formula is: Cost of common stock = (Expected Dividend / Stock Price) + Expected Growth Rate. Plugging in the given values, we get (10/45) + 0.08 = 0.2222 + 0.08 = 0.3022, which is equal to 30.22%. Therefore, the correct answer is 30.22%.

A low price to earnings ratio indicates that the stock price is relatively low compared to the earnings generated by the company. In this case, the low price to earnings ratio is likely the result of low riskier firms. This means that the companies in question may have a higher level of risk associated with their operations, which can lead to lower stock prices and subsequently a lower price to earnings ratio.

Stand-alone risk refers to the variability in the expected returns of a project when it is evaluated in isolation, without considering its impact on the overall portfolio. It is a measure of the uncertainty associated with the project's cash flows and reflects the potential for both positive and negative outcomes. By assessing the stand-alone risk, investors can evaluate the potential rewards and risks of a project independently, allowing them to make informed decisions about its inclusion in their portfolio.