STT Question Answer

List and briefly describe the three general areas

1
of responsibility for a financial manager. 2. capital structure: the mix of long-term debt and equity used to fi

A significant advantage of the sole

proprietorship is that it is inexpensive and easy to form. If the sole
proprietor has limited capital to start with, it may not be desirable t
part of that capital forming a corporation. Also, limited liability for
business debts may not be a significant advantage if the proprieto
Why are so many businesses structured as sole
his or her personal assets tied up in the business already. Finally,
2 proprietorships when the corporate form of business
typical small firm, having an unlimited life for the business has no
offers more advantages?
advantage since the heart and soul of the business is the person w
it, thereby effectively limiting the life of the business to that of its
founder.

Both a sole proprietor and a general partner have

unlimited liability for the firm's debts. However, as a sole proprieto
From a liability point of view, what is the
should be totally aware of all the business dealings of the firm. In
3 difference between investing in a sole proprietorship and a general
partnership, you may or may not handle the financial transactions
partnership?
accepting the responsibility for actions taken not only by yourself,
of your partners.

The primary goal of a financial manager should be

to maximize the current value of the outstanding stock. This goal f
enhancing the returns to stockholders who are the owners of the f
Give some examples of ways in which manager's goals managers frequently are more concerned with their personal bene
4
can differ from those of shareholders. employment, the prestige of their position, and the perks to which
entitled. There are numerous examples, some of which are exces
packages, large corporate offices, excessive staffing, and first-cla
and conference locations, to name a few.

whereby the owners control the firm’s management. What is the main reason that
the directors of the corporation, who in turn appoint the firm’s man
5 an agency relationship exists in the corporate form of organization? In this
This separation of ownership from control in the corporate form of
context, what kinds of problems can arise?
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STT Question
What does liquidity measure? Explain the trade-off a
1 firm faces between high liquidity and low liquidity
standard income statement not be representative of
levels.
2 cash flow, cash
nameinflows
two items
the actual andyou typically
outflows thatfind in net
occurred
3 income that are not in operating cash flow.
Suppose a company’s cash flow from assets is Explain
what each is and why it is excluded in operating
4 negative for a particular period. Is this
company’s
necessarilyliabilities
a good to exceed
sign its assets.
or a bad sign? When this
5
occurs, the owners’ equity is negative. Can this
Answer
demands. However, since liquidity also has an opportunity cost associated trong test bank thi cuối kỳ, nên
revenues, and the
with it—namely thatcosts associated
higher returns canwithgenerally
producingbethose
foundrevenues, to be
by investing the parapharse lại câu chữ và đáp
“booked” when the revenue process is essentially complete, not necessarily
book
when values in accordance
the cash with
is collected or theare
bills matching
paid. Noteprinciple in financial
that this accounting.
way is not
Interest expense is a cash outlay, but it’s a financing cost, not an operating
outlays will be large, possibly leading to negative cash flow from assets. In
general,
buy? Morewhat mattersbecause
generally, is whether
of the moneyand
corporate is spent wisely,
individual not whether
bankruptcy cash
laws,
net worth for a person or a corporation cannot be negative, implying that
STT Question
What effect would the following actions have on a
firm’s current ratio? Assume that net working capital is
positive.
a. Inventory is purchased.
b. A supplier is paid.
1 c. A short-term bank loan is repaid.
d. A long-term debt is paid off early.
e. A customer pays off a credit account.
f. Inventory is sold at cost.
g. Inventory is sold for a profit.

Explain what it means for a firm to have a current

2 ratio equal to .50. Would the firm be better off if
the current ratio were 1.50? What if it were 15.0?

What types of information do common-size

financial statements reveal about the firm? What is
3 the best use for these common-size statements?
What purpose do common–base year statements
have? When would you use them?

Why is the Du Pont identity a valuable tool for

analyzing the performance of a firm? Discuss the
4
types of information it reveals compared to ROE
considered by itself.

Suppose a company lengthens the time it takes to

pay suppliers. How would this affect the statement
5
of cash flows? How sustainable is the change in
cash flows from this practice?
 Những câu bôi vàng là gi
1.0. trong test bank thi cuối kỳ
Answerb. Reducing accounts payable with cash increases the current ratio if it was initially parapharse lại câu chữ và
greater than 1.0. án
c. Reducing short-term debt with cash increases the current ratio if it was initially
greater than 1.0.
d. As long-term debt approaches maturity, the principal repayment and the remaining
interest expense become current liabilities. Thus, if debt is paid off with cash, the current ratio
increases if it was initially greater than 1.0. If the debt has not yet become a current liability, then
paying it off will reduce the current ratio since current liabilities are not affected.
e. Reduction of accounts receivables and an increase in cash leaves the current ratio
unchanged.
f. Inventory sold at cost reduces inventory and raises cash, so the current ratio is
unchanged.
g.
A current ratio ofInventory sold for
0.50 means a profit
that raises
the firm hascash in excess
twice as much of in
thecurrent
inventory recordedasatit
liabilities
cost, so the current ratio increases.
does in current assets; the firm potentially has poor liquidity. If pressed by its short-term
creditors and suppliers for immediate payment, the firm might have a difficult time
meeting its obligations. A current ratio of 1.50 means the firm has 50% more current
assets than it does current liabilities. This probably represents an improvement in
liquidity; short-term obligations can generally be met completely with a safety factor
built in. A current ratio of 15.0, however, might be excessive. Any excess funds sitting
in current assets generally earn little or no return. These excess funds might be put to
better use by investing in productive long-term assets or distributing the funds to
shareholders.

Common size financial statements express all balance sheet accounts as a percentage of Thuật ngữ
total assets and all income statement accounts as a percentage of total sales. Using these "common-size
percentage values rather than nominal dollar values facilitates comparisons between financial
firms of different size or business type. Common-base year financial statements express statements" k
each account as a ratio between their current year nominal dollar value and some phổ biến lắm
trong lúc dạy,
reference year nominal dollar value. Using these ratios allows the total growth trend in nên thay câu
the accounts to be measured. này
Return on equity is probably the most important accounting ratio that measures the
bottom-line performance of the firm with respect to the equity shareholders. The Du
Pont identity emphasizes the role of a firm’s profitability, asset utilization efficiency, and
financial leverage in achieving an ROE figure. For example, a firm with ROE of 20%
would seem to be doing well, but this figure may be misleading if it were marginally
profitable (low profit margin) and highly levered (high equity multiplier). If the firm’s
margins were to erode slightly, the ROE would be heavily impacted.
Increasing the payables period increases the cash flow from operations. This could be beneficial
for the company as it may be a cheap form of financing, but it is basically a one-time change.
The payables period cannot be increased indefinitely as it will negatively affect the company’s
credit rating if the payables period becomes too long.
vàng là giống
thi cuối kỳ, nên
câu chữ và đáp
STT Question

What are the pros and cons of raising capital of

1 enterprises through borrowing from a bank?

Explain the sale approach to financial

planning? What are the pros and cons of this
2 approach?

Using the sale approach, Tudo company just

completed a pro forma with an external
financing need of +10 billion VND. What are the
3 firm's options in this case?

What is the implication of the internal rates of

4 growth?

What is the implication of the sustainable rates

5 of growth?

5-factor Porter model

 Answer

Bank loans: Fast, convenient, and does not change the ownership structure.
However, the involvement of the bank will affect the security of the business's
finances. Besides, the enterprise is responsible for paying interest/principal on
time.

The percentage of sales approach is a financial planning method in which

accounts are varied depending on a firm’s predicted sales level….

With a positive external financing need, the firm has a deficit of funds that it can
increase current liabilities, long-term debt, issue common stock, or decrease
dividends. Depending on the firm’s strategy, each solution may bring both pros
and cons.

The maximum growth rate a firm can achieve without external financing of any
kind. Understanding the implications of both the internal and the sustainable
growth rates helps managers understand the need to limit growth so that the firm
does not attempt to outgrow its resources

The maximum growth rate a firm can achieve without external equity financing
while maintaining a constant debt–equity ratio. Understanding the implications of
both the internal and the sustainable growth rates helps managers understand
the need to limit growth so that the firm does not attempt to outgrow its
resources
STT Question

1 What is the Time Value of Money?

2 What are the Features of Future Value?

What is the Difference between Present Value and

3
Future Value?

What is the Difference between Simple Interest and

4
Compound Interest?

What is the Main Similarities and Differences between

5
Annual Rate and Effective Annual Rate (EAR)?
 Answer

In general, the concept of the time value of money refers to the idea that the value of money
received today is greater than the value of money received a few days later or that the value of
money received in the future is less than the value of money received now. From a financial
standpoint, the value of money changes with time, so a $100 now and $100 four years later is
not the same. A hundred dollars of that time is more valuable. It’s a concept known as the time
value of money.

The top six features of future value are as follows:

• The future value is determined by adding interest to the current value.
• The value of money increases according to the future value.
• If the number of compounds increases, the amount of future value will increase.
• If the number of years increases, the amount of value will increase in the future.
• The higher the interest rate, the higher the future value.
The top 3 differences between and future value are as follows:
The present value is the amount of money that needs to be invested in receiving a certain
amount of money in the future. On the other hand, if you deposit a certain amount of money at
present, the amount of money available after a certain period in the future is called future value.
The purpose of present value is to save money at current prices to save a certain amount of
money in the future. On the other hand, the main purpose of future value is to deposit a certain
amount of money to perform a task.
The present value concept is called discounting, while the method of determining future value is
called
The top compounding.
3 differences between simple interest and compound interest are as follows:
Simple interest is the interest charged on the principal amount at a fixed rate every year. On the
other hand, compound interest is the addition of interest to the principal sum of a loan or deposit,
or in other words, interest on interest.
In the case of simple interest, interest is charged only on the principal amount. On the other
hand, compound interest is always charged at a fixed rate on the principal plus interest in
compound interest.
In the case of simple interest, the amount of interest is comparatively less. On the other hand, in
the case of compound interest, interest is higher than simple interest.
The main similarities between the annual rate and effective annual rate (EAR) are nominal and
effective interest rates are always equal in annual compounding.
The main difference between the annual rate and the effective annual rate (EAR) is that the
effective interest rate increases when the number of compounding increases.
STT Question
1 What is the Time Value of Money?
2 What are the Features of Future Value?
What is the Difference between Present Value and
3
Future
What isValue?
the Difference between Simple Interest and
4
Compound
What is the Interest?
Main Similarities and Differences between
5
Annual Rate and Effective Annual Rate (EAR)?
Answer
STT Question

What happens to the SML graph when risk aversion increases or

1
decreases?

2 Why is it argued that beta is the relevant measure of a stock' risk?

3 Does risk premium relate to systematic or unsystematic risks? Why?

4 What would the SML look like if investors were indifferent to risk? Why?

Where does an asset that is risker than the market portfolio plot on the
5
SML?
 Answer
The steeper the slopes of the line, the more the average investor requires
as compensation for bearing risk. The market risk premium would rise,
causing the required rate of return on a portfolio to increase by the same
amount. The returns on other risky assets also rise, and the effect of this
shift in risk aversion is pronounced on riskier securities.

Firstly, a stock's beta coefficient determines how the stock affects the
riskiness of a well-diversified portfolio. Secondly, we use historical data and
assume that the stock's historical beta will give us a reasonable estimate of
how the stock will move relative to the market in the future

The total risk associated with an asset has two parts: systematic risk and
unsystematic risk. Unsystematic risk can be freely eliminated by
diversification (this is the principle of diversification), so only systematic risk
is rewarded. As a result, the risk premium on an asset is determined by its
systematic risk. This is the systematic risk principle. The level of systematic
risk in a particular asset, relative to the average, is given by the beta of that
asset

The slope of SML reflects the average investor's current willingness to take
on risk. The positive side is good investments while negative correlates to
bad investments
The SML would plot as a horizontal line if investors were indifferent to risk

Because the market portfolio is representative of all of the assets in the

market, it must have average systematic risk. In other words, it has a beta
of 1. An asset that is risker than the market portfolio plots on the right of the
market portfolio, where its beta larger than 1
STT Question

(i) What are the two approaches that can be used to adjust for flotation costs?
1 (ii)Would a firm that has many good investment opportunities be likely to have a
higher or a lower dividend payout ratio than a firm with few good investment
opportunities? Explain.

(i)Why is the after-tax cost of debt rather than the before-tax cost used to
calculate the WACC?
2
(ii) Why is the relevant cost of debt the interest rate on new debt, not that on
already outstanding, or old, debt?

(i) Identify the firm’s three major capital structure components.

(ii) Why might there be two different component costs for common equity?
3
Which one is generally relevant, and for what type of firm is the second one
likely to be relevant?

The after-tax WACC is the correct discount rate for projects that have the same
market risk as the company’s existing business. However, in fact, many firms use
4
after-tax WACC to discount for all project. Why is that practice considered as
dangerous?

Using the CAPM model to estimate the cost of equity are commonplace across
5 corporations. Beta is widely considered as the most important in CAPM formula.
How do firms estimate Beta in practice?
 Answer
(i) Two approaches: (1) add flotation cost to investment cost and (2) increase the cost of
capital.
(ii) If a firm has more good investment opportunities than can be financed with retained
earnings plus the debt and preferred stock supported by those retained earnings, it may need to
issue new common stock. Therefore the more good investment opportunity the firm has, the
higher its retention ratio, thus the lower dividend payout ratio
(i) Because we are interested in maximizing the value of the firm’s stock, and the stock price
depends on after-tax cash flows
(ii) Because the rate at which the firm has borrowed in the past is irrelevant when answering
the capital budgeting question

(i) These are debts, preferred stock and common equity

(ii) There are two source of common equity: retained earnings (internal equity) and newly
issued (external equity). Internal equity is more relevant because external equity reflects the
cost of issuing new stocks so it is rarely relevant except for very young, rapidly growing firms
and firms that do not usually issue new equity

If this practice is followed strictly, the firm will accept too many high-risk projects and reject
too many low-risk projects. It is project risk that counts: the true cost of capital depends on
the use to which the capital is put.

Beta is assessed using historical data in practice. Regressions of historic Beta, based on the
firm stock return and market return can give management an estimated Beta. Another
approach is to calculate the industry Beta, that is the average Beta across the firm industry.
STT Question
Suppose a project has conventional cash flows and a positive NPV. What
do you know about its payback? Its discounted payback? Its profitability
index? Its IRR? Explain.
1

What difficulties might come up in actual applications of the various criteria

we discussed in this chapter? Which one would be the easiest to
implement in actual applications? The most difficult?
2

Are the capital budgeting criteria we discussed applicable to not-for-profit

corporations? How should such entities make capital budgeting decisions?
3

A project has perpetual cash flows of C per period, a cost of I, and a

required return of R. What is the relationship between the project’s
payback and its IRR? What implications does your answer have for long-
4
lived projects with relatively constant cash flows?

If a project with conventional cash flows has a payback period less than
the project’s life, can you definitively state the algebraic sign of the NPV?
Why or why not? If you know that the discounted payback period is less
5
than the project’s life, what can you say about the NPV? Explain.
period must be less than the project life. Since discounted payback is
calculated at the same discountAnswer rate as is NPV, if NPV is positive, the
discounted payback period must be less than the project’s life. If NPV Phần này trong test bank chủ yếu là các câu
is positive, then the present value of future cash inflows is greater hỏi thảo luận về adv and dis của các chỉ tiêu
than the initial investment cost; thus PI must be greater than 1. If (NPV, IRR, PP, DPP, PI), so sánh giữa các
NPV is positive for a certain discount rate R, then it will be zero for chỉ tiêu này theo các cặp, các vấn đề về sunk
some
The largerbiggest
For asingle
project discount ratecash
R*;byflows
difficulty,
with future thus
far, the
is IRR
aremust
coming
that be
withgreater
reliablethan
anupannuity: the
cash cost, opportunity cost, cách tính vốn lưu động
required
flow return. Determining an appropriate discount rate is also not a
estimates. ròng ==> bổ sung thêm các câu hỏi
simple task. These
Payback = I / Cissues are discussed in greater depth in the next
several chapters. The payback approach is probably the simplest,
followed
And bythethe
IRR AAR,
is: but even these require revenue and cost
projections. The discounted cash flow measures (discounted
payback,
0 = –NPV,
I + C IRR,
/ IRRand profitability index) are really only slightly
morethey
Yes, difficult
are.inSuch
practice.
entities generally need to allocate available
capital efficiently,
Solving the IRR justequation
as for-profits do. we
for IRR, However,
get: it is frequently the
case that the “revenues” from not-for-profit ventures are not tangible.
For example,
IRR = C /charitable
I giving has real opportunity costs, but the
benefits are generally hard to measure. To the extent that benefits
are measurable,
Notice this isthe justquestion of an appropriate
the reciprocal required
of the payback. So: return
remains. Payback rules are commonly used in such cases.
IRR = 1 / PB

For long-lived projects with relatively constant cash flows, the

sooner
A paybackthe period
projectless
paysthan
back,
thethe greaterlife
project’s is the IRR.that the NPV is
means
positive for a zero discount rate, but nothing more definitive can be
said. For discount rates greater than zero, the payback period will still
be less than the project’s life, but the NPV may be positive, zero, or
negative, depending on whether the discount rate is less than, equal
to, or greater than the IRR. The discounted payback includes the
effect of the relevant discount rate. If a project’s discounted payback
period is less than the project’s life, it must be the case that NPV is
positive.
STT Question
Loftis Manufacturing, Inc., has recently installed a
just-in-time (JIT) inventory system. Describe the
1 effect this is likely to have on the company’s
carrying costs, shortage costs, and operating cycle.

Is it possible for a firm’s cash cycle to be

longer than its operating cycle? Explain why or why not.
2

What are some of the characteristics of a firm with a long

operating cycle?
3

What are some of the characteristics of a firm with a long cash

cycle?
Indicate the effect that the following will
4
have on the operating cycle. Use the letter I to
indicate an increase, the letter D for a decrease,
and the letter N for no change:
Indicate the impact of the following
a. Average receivables goes up.
corporate actions on cash, using the letter I for an
5 b. Credit repayment times for customers are
increase, D for a decrease, or N
increased.
when no change occurs:
c. Inventory turnover goes from 3 times to 6 times.
a. A dividend is paid with funds received from a
d. Payables turnover goes from 6 times to 11
sale of debt.
times.
6 e. Receivables turnover goes from 7 times to 9
times.
f. Payments to suppliers are accelerated.
 too little cash, họ có thể có
Answer những cách nào để điều chỉnh
a.
Carrying Nocosts
change. A dividendbecause
will decrease paid fortheyby thearesale
not of debt will
holding not change
goods cash
in inventory.
since the cash
Shortage costsraised from the
will probably debt offer
increase goes immediately
depending on how close to shareholders.
the suppliers are
b.
and how Nowellchange.
they canTheestimate
real estate
need.is paid
Thefor by the cash
operating cycleraised from thebecause
will decrease debt, so
this will not change
the inventory periodthe cash balance.
is decreased.
c. No change. Inventory and accounts payable will increase, but neither will
Since
impactthe thecash
cashcycle
account.equals the operating cycle minus the accounts payable
period,
d. it is not possible
Decrease. The short-term for the cash
bank cycle
loantoisbe longer
repaid than
with the which
cash, operating cycle if
will reduce
accounts
the cash payable period is positive. Moreover, it is unlikely that the accounts
balance.
payableDecrease.
e. period would The ever
paymentbe negative
of taxessince that implies
is a cash the firm pays its bills
transaction.
beforeDecrease.
f. they are incurred.
The preferred stock will be repurchased with cash.
These
g. are firms with
No change. relativelyreceivable
Accounts long inventory periods and/or
will increase, but cash relatively
will not long
increase
receivables periods. Thus,
until the sales are paid off. such firms tend to keep inventory on hand, and they
allow customers
h. Decrease.toThe purchase
intereston is credit
paid withandcash,
take awhich
relatively long time
will reduce theto pay.
cash
balance.
i. Increase. When payments for previous sales, or accounts receivable, are
These are firms that have a relatively long time between the time purchased
paid off, the cash balance increases since the payment must be made in cash.
inventory is paid for and the time that inventory is sold and payment received.
k. Decrease. Here the dividend payments are made with cash, which is
Thus,
a. these
Increase.are firms that havego
If receivables relatively
up, short
thepart
timeato payables
collect periods
the and/or relatively
receivables
generally the case. This is different from where debt was raised towould
make the
long receivable
increase, cycles.
which increases the operating cycle.
dividend payment.
b.
l. Increase.
No change.If The
credit repayment
short-term notetimes
will are
not increased,
change thecustomers
cash balance.will take
longer
m. to pay their bills, which will lead to an
Decrease. The utility bills must be paid in cash. increase in the operating cycle.
c.
n. Decrease. If the inventory turnover
A cash payment will reduce cash. increases, the inventory period
decreases.
o. Increase. If marketable securities are sold, the company will receive cash
d.
from the Nosale.
change. The accounts payable period is part of the cash cycle, not the
operating cycle.
e. Decrease. If the receivables turnover increases, the receivables period
decreases.
f. No change. Payments to suppliers affects the accounts payable period,
which is part of the cash cycle, not the operating cycle.