MGT 201 Financial Management - 3
MGT 201 Financial Management - Chapter 5
Questions and Answers
- 1.
Mark all incorrect Statements (Mark all)
- A.
Long Term Liabilities: Also, called Discretionary Financing
- B.
Current Assets Generally grow in proportion to Sales
- C.
Fixed Assets Do not always grow in proportion to Sales
- D.
Current Liabilities also called Spontaneous Financing
- E.
Discretionary Financing grow in proportion to Sales
Correct Answer
E. Discretionary Financing grow in proportion to SalesExplanation
Discretionary financing refers to the funds that a company can choose to raise or not, depending on its financial needs and goals. It is not directly linked to sales, as it is a discretionary decision made by the company's management. Therefore, the statement "Discretionary Financing grows in proportion to Sales" is incorrect.Rate this question:
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- 2.
Mark the long term assets (mark all correct options)
- A.
Marketable securities
- B.
Accounts receivable
- C.
Prepaid expenses
- D.
Inventory
- E.
None
Correct Answer
E. NoneExplanation
The correct answer is "None" because none of the options listed (marketable securities, accounts receivable, prepaid expenses, and inventory) are considered long-term assets. Long-term assets typically include items such as property, plant, and equipment, investments, and intangible assets with a useful life of more than one year.Rate this question:
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- 3.
Changes in sales may not affect (mark all options)
- A.
Marketable securities
- B.
Accounts receivable
- C.
Prepaid expenses
- D.
Inventory
Correct Answer(s)
A. Marketable securities
C. Prepaid expensesExplanation
Current assets include cash, marketable securities, accounts receivable, inventory, and prepaid
expenses. Out of these current assets, changes in cash, accounts receivable and inventory can be directly
linked to changes in sales. However, marketable securities and prepaid expenses are independent of
sales, i.e., changes in sales may not affect these two heads. It is also important to note that the current
assets do not change exactly in the same proportion as the sales in real life situationRate this question:
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- 4.
Current liabilities include (mark all correct options)
- A.
Accounts payable
- B.
Short term portion of long term liabilities
- C.
Loan taken from bank for 2 years
- D.
Accrued expenses
Correct Answer
C. Loan taken from bank for 2 yearsExplanation
The correct options for current liabilities include accounts payable, short term portion of long term liabilities, and accrued expenses. A loan taken from a bank for 2 years is not considered a current liability because it has a longer term and does not need to be repaid within the current operating cycle of the business.Rate this question:
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- 5.
Which formula is correct for the estimation of current assets for the next year
- A.
[Current assets for the current year/Current sales] x Estimated sales for the next year
- B.
[Current sales/Current assets for the current year/] x Estimated sales for the next year
- C.
[Current assets for the current year/Current sales] x Last year sales
- D.
None
Correct Answer
A. [Current assets for the current year/Current sales] x Estimated sales for the next yearExplanation
The correct formula for estimating current assets for the next year is [Current assets for the current year/Current sales] x Estimated sales for the next year. This formula takes into account the current assets and current sales to calculate the estimated current assets for the next year based on the projected sales for that year.Rate this question:
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- 6.
The amount of profit which would be reinvested in the business
- A.
Retained earnings
- B.
Net profit
- C.
Total invested profit
- D.
None
Correct Answer
A. Retained earningsExplanation
the retained earnings—the amount of profit which would be
reinvested in the business. Retained earning forecasting is important so that any shortfall in cash could
be identified and the amount of external financing necessary for the business could also be assessedRate this question:
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- 7.
Expected Estimated retained earnings= estimated sales x profit margin x plowback ratio
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The given statement is true. Estimated retained earnings can be calculated by multiplying the estimated sales with the profit margin and the plowback ratio. Retained earnings represent the portion of a company's net income that is reinvested back into the business rather than distributed to shareholders as dividends. By estimating the sales, profit margin, and plowback ratio, a company can determine the expected retained earnings for a given period.Rate this question:
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- 8.
_________ = 1 - pay out ratio
- A.
Pay out ratio
- B.
Plow back ratio
- C.
Profit margin ratio
- D.
Retained earning
Correct Answer
B. Plow back ratioExplanation
The given correct answer is "Plow back ratio." The plow back ratio refers to the proportion of earnings that a company chooses to reinvest back into the business rather than distributing it to shareholders as dividends. It indicates the amount of profits that the company retains for future growth and expansion. A higher plow back ratio suggests that the company is reinvesting a larger portion of its earnings back into the business, which can lead to increased capital investment and potential for higher future profits.Rate this question:
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- 9.
__________ =dividend/net income
- A.
Retained earning
- B.
Earning per share
- C.
Pay out ratio
- D.
Profit margin ratio
Correct Answer
C. Pay out ratioExplanation
The pay out ratio is a financial metric that measures the proportion of earnings that a company distributes to its shareholders in the form of dividends. It is calculated by dividing the dividends paid by the net income. This ratio indicates how much of the company's profits are being returned to shareholders and how much is being retained for reinvestment or other purposes. Therefore, the pay out ratio is the correct answer as it represents the equation given in the question.Rate this question:
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- 10.
Which formula is used to calculate the Profit margin
- A.
Profit margin=net income/sales
- B.
Profit margin=Net sales/net income
- C.
Profit margin= Total income/sales
- D.
Profit margin= Total sales - total expenses
Correct Answer
A. Profit margin=net income/salesExplanation
The formula used to calculate the profit margin is net income divided by sales. This formula helps determine the percentage of each sales dollar that is profit. By dividing the net income by the sales, we can understand how efficiently a company is generating profit from its sales revenue. The higher the profit margin, the more profitable the company is.Rate this question:
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- 11.
Estimated discretionary financing can be calculated from the following follwoing formula
- A.
Estimated total assets –estimated total liabilities- estimated total equity
- B.
Estimated total assets –estimated total liabilities +estimated total equity
- C.
Estimated total liabilities- estimated total equity - estimated total assets
- D.
None
Correct Answer
A. Estimated total assets –estimated total liabilities- estimated total equityExplanation
discretionary financing also known as long term liabilities can be calculated
estimated total assets –estimated total liabilities- estimated total equityRate this question:
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- 12.
G (Desired Growth Rate) = return on equity x (1- pay out ratio)
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The formula provided states that the desired growth rate (G) is equal to the return on equity multiplied by the difference between 1 and the payout ratio. This formula is used to calculate the expected growth rate based on the return on equity and the proportion of earnings that are retained by the company instead of being paid out as dividends. Therefore, the statement "G (Desired Growth Rate) = return on equity x (1- payout ratio)" is true.Rate this question:
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- 13.
Return on equity is
- A.
Total equity / Net income
- B.
Net income/ total equity
- C.
Net profit / total equity
- D.
Net income / owner's equity
Correct Answer
B. Net income/ total equityExplanation
Return on equity is a financial ratio that measures the profitability of a company by comparing its net income to its total equity. It indicates the amount of profit generated for each dollar of equity invested in the company. By dividing the net income by the total equity, this ratio provides insight into how effectively a company is utilizing its equity to generate profits. A higher return on equity signifies better financial performance and efficiency in utilizing shareholder's investments.Rate this question:
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- 14.
Which is not Drawback of Percent of Sales Method
- A.
It is only a rough approximation
- B.
Change in fixed assets during the foretasted period will not yield very accurate answer
- C.
Lumpy assets are not taken into account
- D.
None
Correct Answer
D. NoneExplanation
The correct answer is "None" because the question is asking for a drawback of the Percent of Sales Method, and all the options provided are not drawbacks. The first option states that it is only a rough approximation, which is a characteristic of the method but not necessarily a drawback. The second option mentions that changes in fixed assets may not yield accurate answers, but this is not a drawback specific to the Percent of Sales Method. The third option states that lumpy assets are not taken into account, but this is also not a drawback of the method itself. Therefore, none of the options provided indicate a drawback of the Percent of Sales Method.Rate this question:
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- 15.
Mark all the correct options for for lumpy assets (mark all correct options)
- A.
Not all assets can be purchased or acquired in bits and pieces
- B.
Assests that cannot be acquired in small increments
- C.
Must be obtained in large, discrete units
- D.
Buying of half a plant one year, and another half several years later is example of lumpy assets
Correct Answer(s)
A. Not all assets can be purchased or acquired in bits and pieces
B. Assests that cannot be acquired in small increments
C. Must be obtained in large, discrete unitsExplanation
Assests that cannot be acquired in small increments but must be obtained in large, discrete units. (like full plant instead of half plant one year and half next year)Rate this question:
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- 16.
An annuity is a series of fixed payments, which might be over a fixed number of years
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
An annuity refers to a sequence of regular, fixed payments that are made over a specific period of time. These payments can be made monthly, quarterly, or annually. Therefore, the statement that an annuity is a series of fixed payments over a fixed number of years is correct. An annuity is often used for retirement planning or as an investment vehicle.Rate this question:
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- 17.
An ordinary annuity, also known as deferred annuity
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
An ordinary annuity, also known as a deferred annuity, is a type of annuity where the payments are made at the end of each period. This means that the annuity payments are not immediate, but rather postponed to a later date. Therefore, the statement "An ordinary annuity, also known as deferred annuity" is true.Rate this question:
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- 18.
An annuity due consists of a series of equal payments at the beginning of each period.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
An annuity due is a type of financial arrangement where a series of equal payments are made at the beginning of each period. This is different from a regular annuity where the payments are made at the end of each period. In an annuity due, the first payment is made immediately, and subsequent payments are made at the beginning of each period. This type of arrangement is commonly seen in leases, insurance premiums, and certain types of investments. Therefore, the statement "An annuity due consists of a series of equal payments at the beginning of each period" is true.Rate this question:
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- 19.
If we have to calculate the future value of the annuity on a monthly basis, we would use the
- A.
=CCF X {[(1+i/m)^nxm -1]/ (i/m)}
- B.
=CCF X {[(1+i/m)^nxm -1]/ i}
- C.
=CCF X {[(1+i)^n -1]/ (i)}
- D.
None
Correct Answer
A. =CCF X {[(1+i/m)^nxm -1]/ (i/m)}Explanation
The correct answer is =CCF X {[(1+i/m)^nxm -1]/ (i/m)}. This formula is used to calculate the future value of an annuity on a monthly basis. It takes into account the compounding frequency (m), the interest rate (i), the number of periods (n), and the cash flow (CCF). By using this formula, we can determine the future value of the annuity accurately.Rate this question:
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- 20.
If we have to calculate the future value of the annuity on a monthly basis, we would use the
- A.
=CCF X {[(1+i/m)^nxm -1]/ (i/m)}
- B.
=CCF X {[(1+i/m)^nxm -1]/ i}
- C.
=CCF X {[(1+i)^n -1]/ (i)}
- D.
None
Correct Answer
C. =CCF X {[(1+i)^n -1]/ (i)}Explanation
To calculate the future value of an annuity on a monthly basis, we would use the formula =CCF X {[(1+i)^n -1]/ (i)}. This formula takes into account the compounding factor (CCF), the interest rate (i), and the number of periods (n). By raising (1+i) to the power of n and subtracting 1, we calculate the future value of the annuity. Finally, dividing by the interest rate (i) accounts for the monthly compounding.Rate this question:
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- 21.
To calculate the intrinsic value of the annuity.
- A.
First calculate the future value of annuity and then Present value
- B.
First Calculate Present value of annuity then Future value
- C.
Calculate only future value of annuity
- D.
None
Correct Answer
A. First calculate the future value of annuity and then Present valueExplanation
The present value of annuity can also be called the intrinsic value of the annuity.
First of all we calculate the future value of annuity by
=CCF X {[(1+i/m)^nxm -1]/ i} or =CCF X {[(1+i/m)^nxm -1]/ (i/m)} formula then we calculate the PV of that FV by PV = FV/(1+i)^nRate this question:
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- 22.
The present value of annuity can also be called the intrinsic value of the annuity.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The present value of an annuity refers to the current value of the future cash flows that will be received from the annuity. It takes into account the time value of money, discounting the future cash flows to their present value. Intrinsic value, on the other hand, refers to the inherent or fundamental value of an asset or investment. In the context of an annuity, the present value represents its intrinsic value because it reflects the current worth of the expected cash flows. Therefore, the statement is true.Rate this question:
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- 23.
PV = CCF / i is the formula for Perpetuity calculation
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true. The formula PV = CCF / i is indeed used for calculating the value of a perpetuity. PV represents the present value of the perpetuity, CCF stands for the cash flow per period, and i represents the discount rate or interest rate. By dividing the cash flow per period by the discount rate, we can determine the present value of the perpetuity.Rate this question:
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- 24.
How much money do you need to deposit in the Bank Account offering 10% pa so that the Account will pay you Rs 200,000 of interest income every year forever
- A.
200,000
- B.
2,000,000
- C.
20,000,000
- D.
None
Correct Answer
B. 2,000,000Explanation
above is example of perpetuity and in case of that we have to calculate the PV by the following formula
PV = CCF / i = 200,000 / 0.10 = Rs 2,000,000Rate this question:
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