Financial Management Domain Practice Test

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