Financial Strategy Quiz

The primary goal of financial management is to maximize shareholder wealth, not necessarily current profits.

• True

• Flase

Answer explanation

True. The primary goal of financial management is to maximize shareholder wealth over the long term, which may not always align with maximizing current profits. This focus ensures sustainable growth and value creation.

Which of the following is an advantage of the corporate form of organization?

• Unlimited liability

• Double taxation

• Ease of transferring ownership

• Limited access to capital markets

Answer explanation

The corporate form of organization allows for ease of transferring ownership through the sale of shares, making it more flexible compared to other forms. This is a significant advantage over unlimited liability and double taxation.

A company’s current assets are $50,000, and its current liabilities are $20,000. What is its current ratio?

• 0.4

• 2.5

• 3.0

• 2.0

Answer explanation

The current ratio is calculated by dividing current assets by current liabilities. Here, it is $50,000 / $20,000 = 2.5, which indicates the company has 2.5 times more current assets than current liabilities.

Depreciation is a noncash expense that is added back to net income when calculating cash flow from operations.

• True

• False

Answer explanation

True. Depreciation is a noncash expense, meaning it does not involve actual cash outflow. When calculating cash flow from operations, it is added back to net income to reflect the true cash generated by the business.

Which of the following would most likely increase a firm's return on equity (ROE)?

• A decrease in the profit margin

• A decrease in total assets

• An increase in total equity

• An increase in net income

Answer explanation

An increase in net income directly boosts a firm's profitability, leading to a higher return on equity (ROE). Other options either decrease profitability or increase equity, which would lower ROE.

The internal rate of return (IRR) assumes that all project cash flows are reinvested at the IRR, which can be unrealistic.

• True

• False

Answer explanation

True. The internal rate of return (IRR) indeed assumes that all project cash flows are reinvested at the IRR, which can be unrealistic in practice, as actual reinvestment rates may differ.

If a firm has a net income of $60,000, total assets of $500,000, and total equity of $300,000, what is its return on assets (ROA)?

• 10%

• 12%

• 15%

• 20%

Answer explanation

Return on Assets (ROA) is calculated as Net Income / Total Assets. Here, ROA = $60,000 / $500,000 = 0.12 or 12%. Thus, the correct answer is 12%.

Which of the following ratios measures a company’s short-term liquidity?

• Debt-to-equity ratio

• Quick ratio

• Profit margin

• Return on equity (ROE)

Answer explanation

The quick ratio measures a company's short-term liquidity by comparing its most liquid assets to its current liabilities. Unlike the debt-to-equity ratio, profit margin, and ROE, it specifically assesses immediate financial health.

In capital budgeting, the payback period method considers the time value of money.

• True

• False

Answer explanation

The payback period method does not consider the time value of money; it simply measures how long it takes to recover the initial investment. Therefore, the correct answer is False.

What is the present value of $5,000 to be received 3 years from now, assuming a discount rate of 6%?

• $4,200

• $4,450

• $4,200

• $4,198

Answer explanation

To find the present value (PV), use the formula PV = FV / (1 + r)^n. Here, FV = $5,000, r = 0.06, and n = 3. Thus, PV = 5000 / (1 + 0.06)^3 = 5000 / 1.191016 = $4,198. The correct answer is $4,198.