Financial Management Domain Practice Test

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• If forecasted sales next year are $1,000,000, gross margin is 25%, and operating expenses are 15% of sales, what is forecasted operating income?
• Which maturity range applies to Treasury notes?
• What does Interest Rate Parity (IRP) imply about exchange rates and interest rates?
• How does a forward contract hedge currency risk?
• Notes to financial statements are prepared by which party?
• Which items are included in the operating budget?
• Investment yield is defined as what?
• Which measure describes the maximum potential loss at a given confidence level over a defined horizon?
• Which statement best defines the gearing ratio?
• According to the Pecking Order Theory of financing, which source is preferred first by firms?
• When a Treasury note or bond matures, the buyer receives the full face value. True or False?
• Dividend clientele effect refers to which phenomenon?
• Which metric measures the average time to collect receivables?
• The phrase component inventory is associated with which budgeting concept?
• Define operating leverage and financial leverage.
• What does reconciliation of expenses and revenue entail?
• Which document or concept is primarily used to determine a stable and equitable funding plan for anticipated future major common area expenditures?
• Name one non-quantitative rationale for a stable dividend policy.
• Quick ratio is defined as (Cash + Marketable securities + Accounts receivable) divided by current liabilities. If cash $50k, AR $150k, current liabilities $180k, what is the quick ratio?
• What does DSO measure?
• Which term best describes non-diversifiable market risk?
• Which of the following is NOT listed as an example of investments?
• FCFF represents cash flow available to which claimants?
• Treasury notes and bonds are issued in denominations of?
• Which organization buys mortgages from lenders and requires certain types of insurance to be in place?
• Which concept explains how debt's interest expense reduces a firm's tax bill?
• FHLMC is an acronym used in financing discussions. What does it stand for?
• What is the formula for the cash conversion cycle (CCC)?
• What is the primary distinction between debt and equity financing from a control perspective?
• Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. Which statement is true?
• The equity multiplier in the DuPont framework represents what form of leverage?
• Which expression defines FCFF?
• Baseline funding is the goal of this funding strategy to keep the reserve cash balance above zero. What does this mean?
• Gearing ratio example: If total debt is $400,000 and total equity is $600,000, what is the gearing ratio?
• Replacement fund consists of funds set aside for what purpose?
• A firm finances with 60% equity at 12% cost and 40% debt with 6% pre-tax cost and 30% tax rate. Compute the weighted average cost of capital (WACC).
• What is the quick ratio formula?
• In the static trade-off theory of capital structure, the optimal debt level occurs where which two components balance?
• The sustainable growth rate g equals ROE times the retention ratio. If ROE is 20% and retention ratio is 0.4, what is g?
• Which action would increase the sustainable growth rate (g) assuming ROE remains constant?
• What is the future value of an ordinary annuity paying 200 per year for 7 years at 8%?
• When hedging currency risk with options, which statement is most accurate regarding flexibility?
• Which metric is more sensitive to changes in the discount rate: NPV or profitability index?
• ROE is defined as which ratio?
• Which form of market efficiency is associated with publicly available information?
• What is the decision rule for NPV in capital budgeting?
• What is an engagement letter in the context of professional services?
• When a lease is classified as a financial lease, what is the typical impact on financial statements?
• Which bankruptcy chapter is designed to reorganize a corporation to continue operations?
• Which statement best describes the dividend clientele effect?
• Payback period: Initial investment $500,000; annual cash inflows $150,000. What is the payback period?
• What is Chapter 11 bankruptcy designed to do?
• Translation exposure refers to the impact of currency movements on consolidated financial statements when converting foreign subsidiaries' results to the parent currency.
• Which factor would justify a higher P/E ratio?
• If the internal rate of return (IRR) of a project is 12% and the required return is 10%, should the project be accepted?
• Conflicts of interest in finance primarily challenge which ethical principle?
• What is the dividend payout ratio and why is its sustainability important?
• Who prepares the notes to financial statements?
• Which statement describes a compilation?
• In cash budgeting, what is the purpose of a cash surplus/shortage forecast?
• What is the frequency of interest payments for Treasury notes and bonds?
• In the statement of cash flows, which activity includes cash transactions related to borrowing or repaying debt?
• Which statement accurately describes the replacement fund in relation to the operating budget?
• Acceleration refers to which concept regarding assessments?
• Bad debt write-off involves which action?
• In CAPM, the term RM − RF is known as what?
• In a DCF valuation, what is subtracted from enterprise value to derive equity value?
• Which statement best describes the value of real options in projects?
• Differentiate translation exposure and transactional exposure in international finance.
• Operating expenses are best described as which of the following?
• An assessment is best described as what?
• Mergers and acquisitions can create synergies in two primary categories. Which two categories are commonly cited?
• What is yield to maturity (YTM)?
• Fund reporting method consists of preparing separate columns for which funds?
• The statement of income and expense records the community association's financial transactions during a given period, typically for a month plus the fiscal year to date. Over what period does it cover?
• Why is the after-tax cost of debt used in WACC?
• Which item is excluded from the quick ratio calculation?
• How do sensitivity analysis and scenario analysis differ?
• If tax rate Tc increases while other variables constant, what happens to WACC?
• Which equation defines FCFE?
• Which of the following describes the relationship between risk and the discount rate used in capital budgeting?
• In capital budgeting, which cash flows should be included in the analysis?
• Zero-based budgeting requires what practice?
• What is the tax shield effect of debt?
• Write the standard after-tax weighted average cost of capital (WACC) formula.
• Which statement best describes a reserve cash flow statement?
• In the DuPont framework, the equity multiplier captures the effect of which concept?
• Which accounting method records income when it is earned and expenses when incurred?
• Personal money judgment refers to:
• Which budget section explicitly excludes the replacement fund?
• Discretionary budget line items are typically based on which factor?
• Why is Depreciation added back in the FCFF formula?
• A project requires an initial investment of $500,000 and generates cash inflows of $120,000 per year for 7 years. What is the net present value at a 9% discount rate?
• What is the primary financing mechanism for early-stage startups that postpones immediate equity dilution?
• Which term refers to a cash reserve set aside for future replacements?
• Which statement differentiates transaction exposure from translation exposure?
• Chart of accounts is an organized list of titles, descriptions and assigned numbers of all accounts in an organization's general ledger. The assigned number helps you locate the account. The title describes the purpose of the account. What is the chart of accounts primarily used for?
• What does EV/EBITDA measure and why is it used?
• Distinguish between the current ratio and the quick ratio.
• If ROE is 25% and the retention ratio is 0.6, what is the sustainable growth rate g?
• In MM with taxes, what term represents the tax shield from debt that increases firm value?
• According to Modigliani-Miles theorem with corporate taxes, how does leverage affect firm value?
• As the discount rate increases, what happens to the net present value (NPV) of a project with fixed cash inflows?
• How do taxes affect capital budgeting analysis?
• Name a common quantitative forecasting method used in FP&A.
• Chapter 7 bankruptcy is commonly known as which of the following?
• Under the residual theory, if there are no positive-NPV projects, what payout policy results?
• A project requires an initial investment of $1,000,000 and has a PV of inflows of $1,100,000 at the required rate. What is the profitability index (PI)?
• What is the present value of an ordinary annuity paying 200 per year for 7 years at 8%?
• In CAPM, what does beta measure?
• A net loss occurs when which of the following conditions hold?
• After-tax cost of debt is calculated as r_d*(1 - tax rate). If pre-tax cost of debt is 8% and tax rate is 30%, what is the after-tax cost?
• What is the correct sequence for a DCF valuation?
• DuPont analysis decomposes ROE into which three components?
• Which expression correctly defines FCFE (free cash flow to equity)?
• What are synergies in an acquisition, and why are they important?
• In a chart of accounts, what does the account number primarily help you do?
• The Fair Debt Collection Practices Act requires that the person who owes a debt receive what?
• Residual dividend theory suggests dividends should be paid only after funding what?
• In capital budgeting, why are depreciation methods and tax rate changes relevant?
• Why might a multinational project be evaluated using a country-risk-adjusted discount rate?
• Economic Value Added (EVA) is defined as NOPAT minus which cost?
• What is the present value of 1,000 to be received in 5 years at a 6% annual discount rate, compounded annually?
• The statement of cash flows summarizes the flow of funds into and out of the community association, including normal operations, investment activities, and borrowing activities. Which activities are shown?
• Which formula defines the quick ratio?
• What is the future value of 1,000 invested for 5 years at 6% annual return, compounded annually?
• What is the break-even point?
• Which statement best describes the real option value in capital budgeting?
• In evaluating a project using the profitability index (PI), which of the following is a correct representation of PI and its acceptance criterion?
• What is the goal described by full funding in community finances?
• What does a profitability index (PI) greater than 1 indicate for a project?
• Which hedging instrument is standardized and traded on exchanges, typically with daily mark-to-market?
• In capital budgeting, what does the real option value represent?
• In zero-based budgeting, what is required for each line item?
• What is a pro forma income statement?
• Chapter 13 bankruptcy is used to reorganize personal or non-corporate debt. A plan is submitted to a judge for paying off all or nearly all of the debt over a specified period of time. Which statement best summarizes its purpose?
• What is the replacement fund primarily intended to cover for a community's property?
• What does CPA stand for?
• What does FHA stand for in the context of community associations?
• Which budget category includes the cash budget and pro forma statements?
• What are the three components of ROE in the DuPont analysis?
• What is a real option in project evaluation?
• What does the residual theory of dividend policy state?
• Which form of market efficiency claims that prices reflect all past price and volume data?
• P/B ratio interpretation: A high price/book value ratio typically indicates what?
• Modified cash basis accounting records income and expenses on a cash basis with selected items recorded on an accrual basis. Which statement describes this method?
• The cash conversion cycle (CCC) is calculated as DIO + DSO - DPO. If DIO=40 days, DSO=35 days, DPO=25 days, CCC equals?
• What does MM Proposition I with taxes state?
• Who performs an audit of an organization's financial records?
• Under the fund method of reporting, members' equity is referred to as what?
• WACC is calculated using which of the following components?
• In a standard DCF, which type of cash flow is used to determine enterprise value?
• Which statement describes the reserve cash flow statement?
• Which budgeting approach is characterized by starting from zero for each item and justifying allocations?
• In currency risk management, which strategy is a natural hedge?
• If net income increases while average shareholders' equity remains the same, what happens to ROE?
• How is the cost of preferred stock calculated?
• Which accounting method records income when collected and expenses when paid?
• Threshold funding is based on which concept?
• In threshold funding, the minimum reserve balance is set as what?
• What is the role of the FDIC?
• Net income is the amount left after deducting expenses from income. Which option best defines it?
• If a PI is 1.10, what percent higher is the present value of inflows compared with the initial investment?
• In community association accounting, are land and buildings generally shown as assets?
• What is the primary purpose of GAAP?
• Which set of fund categories is represented in the fund reporting method?
• Transaction exposure arises from which of the following?
• If a bond trades at a premium, which statement is true about its yield relative to its coupon rate?
• Which statement about Chapter 7 bankruptcy is true?
• ROE stands for?
• How is revenue defined in a community association context?
• A representation letter is a letter from the CPA that states that the information the community association provides is true to the best of its knowledge. What is this letter?
• What is the Economic Order Quantity (EOQ) model used to determine?
• How do ROA and ROE differ in relation to leverage?
• Why is ethics important in financial management?
• Payback period limitation question: which statement best describes its primary limitation?
• A 10-year bond has an annual coupon of 8% and face value $1,000. If the yield to maturity is 6%, what is the approximate price of the bond?
• Which statement about the relationship between IRR and the discount rate is true?
• If the PV of inflows is $1,100,000 and the initial investment is $1,000,000, what is the net present value (NPV) of the project?
• Which statement describes NOT being a typical purpose of the replacement fund?
• What is the present value of $2,000 to be received in 5 years at an 8% annual discount rate?
• In the commercial reporting method, how are operating and reserve activities presented?
• How does a higher credit rating affect the yield demanded by investors?
• The Economic Order Quantity (EOQ) formula is Q* = sqrt(2DS/H). If D=10,000 units/year, S=$200 per order, and annual holding cost per unit H=$2, what is EOQ (approximately)?
• If corporate tax rate Tc increases while debt remains the same, what happens to the after-tax cost of debt in WACC?
• The operating cycle in days is defined as which of the following?
• Which statement best describes asset turnover?
• What is a major limitation of the payback period criterion?
• How does risk affect the discount rate used in capital budgeting?
• When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest.
• Interest coverage ratio is defined as EBIT divided by interest expense. If EBIT=900,000 and interest=300,000, what is the ratio?
• What is an option's intrinsic value for a call option with strike K and current stock price S?
• Major improvement expenses are defined as which type of costs?
• If net profit margin is 4%, asset turnover is 1.8, and equity multiplier is 1.6, what is ROE according to the DuPont formula?
• Value at Risk (VaR) is best described as...
• In a lien situation, which party is primarily protected by the lien's enforcement?
• Name two liquidity ratios and two profitability ratios.
• What is a cash budget and why is it essential for liquidity management?
• Which statement about depreciation and tax shields is true?
• What does the internal rate of return (IRR) represent in capital budgeting?
• Revenue in a community association context is primarily used to cover what?
• In the Pecking Order Theory, which financing option is considered the last resort?
• Foreclosure is best described as:
• In EVA, what is the capital charge subtracted from NOPAT?
• What is the purpose of a reserve study?
• FNMA is an acronym used in mortgage programs. What does it stand for?
• What is the main difference between commercial reporting and fund reporting?
• What is a financial lease and how does it influence reported debt?
• What is the minimum denomination for Treasury bills?
• If internal funds are insufficient, what is the next preferred financing source in the Pecking Order Theory?
• In a DCF valuation, which rate is used to discount the forecast unlevered free cash flows to obtain enterprise value?
• Using CAPM with risk-free rate 2%, expected market return 8%, and beta 1.2, what is the expected return?
• Notes to financial statements accompany the CPA-prepared financial statements and provide additional information to help readers understand the association's financial situation. What is their purpose?
• Name two common sources of short-term financing for working capital.
• A lien is defined as:
• Which inputs are used in the CAPM example?
• Which of the following are examples of investments as defined in the material?
• Which statement best explains why ROE can exceed ROA?
• Which agency regulates and influences insurance requirements and upkeep standards for community associations?
• Given annual credit sales of $1,200,000 and average accounts receivable of $150,000, calculate DSO (in days) using 365 days year.
• How does financial leverage affect return on equity (ROE)?
• In evaluating a project, should sunk costs be included in the cash flow analysis?
• What is the basic idea of Value at Risk (VaR)?
• FDIC stands for which organization?
• Name one major limitation of the payback period method.
• Inventory turnover ratio is COGS divided by average inventory. If COGS = $600,000 and average inventory = $100,000, what is the turnover?
• Which of the following best describes liabilities in financial reporting?
• P/E ratio interpretation: A high P/E may indicate what?
• Which statement best describes a balance sheet?
• GAAP stands for which of the following?
• At maturity, what does the holder of a Treasury bill receive?
• What does ΔNWC represent in cash flow calculations?
• Historical trend budgeting is best described as which approach?
• In Chapter 13 bankruptcy, to whom is the repayment plan submitted for approval?
• What is the primary purpose of an audit?
• What best defines expenses in the context of community budgeting?
• Two main components of the master budget?