Financial Management and Analysis

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Questions and Answers

Why are cash flows that occur earlier considered less valuable than cash flows that occur later?

Because they are more difficult to manage

Because they are taxed at a higher rate

Because they are less certain

Because they are invested for a shorter period of time (correct)

How do firms typically borrow money from investors?

By demonstrating ownership of the corporation

By liquidating assets

By selling equity securities

By selling debt securities in the debt market (correct)

What is the most preferred capital budgeting method for small businesses?

Annuity method

Internal rate of return method

Discounted cash flow method

Payback period method (correct)

What is a major decision that a financial manager has to make?

Source of finance Signup and view all the answers

Why is the Internal Rate of Return (IRR) preferred by financial managers?

The IRR is suitable for comparing projects which differ in size or scope Signup and view all the answers

Which of the following cash flows are generally NOT included in incremental project cash flows?

Overheads Signup and view all the answers

What type of market is where newly issued shares are traded?

Primary market Signup and view all the answers

What is the characteristic of preference shareholders?

They have no residual claim on assets Signup and view all the answers

What is the most important factor to consider when evaluating the efficiency of a business?

Gross profit ratio Signup and view all the answers

What is the primary purpose of comparative ratio analysis in business?

To evaluate similar businesses Signup and view all the answers

What is the effective annual rate of interest on a savings account with a monthly interest rate of 1%?

12.68% Signup and view all the answers

If a country has a 30% inflation rate and a loaf of bread costs 100 liras today, what was its price last year?

66.67 Signup and view all the answers

What is the primary document that provides a comprehensive overview of a company's financial performance?

Annual Report Signup and view all the answers

What is the main difference between the current ratio and the quick ratio?

The current ratio includes inventories, but the quick ratio does not Signup and view all the answers

What is an annuity?

A series of equal payments at equal time periods guaranteed for a fixed number of years Signup and view all the answers

What is the fundamental concept underlying the time value of money?

The cash flows that occur earlier are more valuable than cash flows that occur later Signup and view all the answers

Study Notes

Financial Analysis and Management

The efficiency of a business can be determined by the gross profit ratio.
Comparative ratio analysis helps in evaluating similar businesses.

Interest Rates and Inflation

The effective annual rate of interest can be calculated using the monthly interest rate.
With a steady 30% inflation rate, the price of a loaf of bread last year would be 76.92 liras.

Financial Statements

An annual report is a statement of a company's operating and financial performance issued at the end of its fiscal year.
It includes the balance sheet, income statement, and statement of cash flow.

Ratios and Annuities

The current ratio includes inventories, while the quick ratio does not.
An annuity is a series of equal payments at equal time periods and guaranteed for a fixed number of years.

Time Value of Money and Capital Budgeting

The concept of time value of money states that cash flows that occur earlier are more valuable than cash flows that occur later.
Firms borrow money from investors by selling debt securities in the debt market.
The payback period method is the most preferred capital budgeting method for small businesses.

Financial Management Decisions

A financial manager has to make major decisions such as working capital management, source of finance, profitability decision, and dividend payment.
The internal rate of return is preferred because it can handle complications like unconventional cash flows and multiple rates of return.

Project Cash Flows and Capital Budgeting

Incremental project cash flows do not include interest payments.
The internal rate of return is preferred because it does not require a discount rate to be specified.

Securities and Markets

Trade in newly issued shares occurs in the primary market.
A bond selling at a price lower than its face value is selling at a discount.

Shareholders and Managers

Preference shareholders have no residual claim on assets and no voting rights.
The managers of a company are appointed by the representatives of the shareholders.

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Description

Quiz questions about evaluating business performance, including efficiency, investment, and financial analysis. Topics include gross profit ratio, accounts receivable turnover, and comparative ratio analysis.