D362 Corporate Finance
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Free D362 Corporate Finance Questions
A company has an AR turnover ratio of 8. If the total credit sales for the year are $400,000, what is the average accounts receivable balance for the company?
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$50,000
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$100,000
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$200,000
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$300,000
Explanation
Explanation:
The accounts receivable (AR) turnover ratio is calculated as: AR Turnover = Credit Sales ÷ Average Accounts Receivable. Rearranging the formula to solve for Average Accounts Receivable gives: Average AR = Credit Sales ÷ AR Turnover. Here, Average AR = $400,000 ÷ 8 = $50,000. This represents the average amount of receivables outstanding over the period.
Correct Answer:
$50,000
What is the primary benefit of the net operating losses tax rule for businesses?
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It allows businesses to reduce their tax liabilities in the current year.
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It permits businesses to carry forward losses indefinitely to offset future taxable income.
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It enables businesses to receive immediate tax refunds for losses.
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It requires businesses to pay taxes on their losses.
Explanation
Explanation:
The net operating losses (NOL) tax rule allows businesses to carry forward losses to offset taxable income in future years. This provides tax relief by reducing future tax liabilities when the company becomes profitable. The rule helps stabilize a firm’s cash flow and encourages continued investment and operations despite temporary financial setbacks, ensuring that losses do not permanently erode the firm’s ability to manage taxes.
Correct Answer:
It permits businesses to carry forward losses indefinitely to offset future taxable income.
What formula is used to calculate daily credit sales in corporate finance?
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Sales/30
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Sales/365
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Sales/12
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Sales/52
Explanation
Explanation:
Daily credit sales are calculated by dividing the total annual sales by the number of days in a year, typically 365, to determine the average amount of sales generated per day. This figure is essential for analyzing accounts receivable metrics, such as Days in Receivables, and helps assess the efficiency of a company’s credit and collection policies. Using daily sales provides a standardized measure to evaluate cash flow and liquidity management.
Correct Answer:
Sales/365
What does EBIT stand for in the context of corporate finance?
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Earnings Before Interest and Taxes
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Earnings Before Income and Taxes
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Earnings Before Investment and Taxes
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Earnings Before Interest and Transfers
Explanation
Explanation:
EBIT, or Earnings Before Interest and Taxes, is a measure of a company’s profitability from operations before accounting for interest expenses and income taxes. It reflects the core operational performance of the business, excluding the effects of financing and tax strategies. EBIT is commonly used by investors and analysts to compare operational efficiency across companies and assess the ability to generate profits from operations alone.
Correct Answer:
Earnings Before Interest and Taxes
Explain the liability structure of a general partnership and how it affects the owners' responsibilities.
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Owners have limited liability for business debts.
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Owners are only responsible for their own actions.
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Each owner is fully responsible for all liabilities of the partnership.
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Liabilities are shared equally among owners.
Explanation
Explanation:
In a general partnership, all owners (partners) have unlimited personal liability for the debts and obligations of the business. This means that each partner is fully responsible for the partnership’s liabilities, not just their own contributions or actions. Creditors can pursue any partner’s personal assets to satisfy business debts. This structure affects decision-making and risk, as partners must carefully consider their financial exposure when entering into obligations on behalf of the partnership.
Correct Answer:
Each owner is fully responsible for all liabilities of the partnership.
What is the primary purpose of the price/earnings (P/E) ratio in corporate finance?
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To measure a company's total assets
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To compare the price of a company's stock to the earnings the company generates
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To assess a company's market share
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To evaluate the liquidity of a company
Explanation
Explanation:
The price/earnings (P/E) ratio is used to evaluate how the market values a company's earnings. It is calculated by dividing the market price per share by the earnings per share (EPS). A high P/E ratio may indicate that investors expect strong future growth, while a low P/E may suggest undervaluation or weaker growth expectations. This ratio is a fundamental tool for comparing stock valuation across companies and industries.
Correct Answer:
To compare the price of a company's stock to the earnings the company generates
What is the primary market in the context of corporate finance?
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A market where existing securities are traded among investors
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A market where corporations sell new securities to raise capital
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A market focused on the trading of commodities
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A market for long-term debt instruments
Explanation
Explanation:
The primary market is the segment of the financial market where corporations issue new securities to raise capital directly from investors. In this market, the company receives the proceeds from the sale of stocks or bonds, which can be used to finance expansion, operations, or other business needs. This differs from the secondary market, where existing securities are traded among investors without providing funds directly to the issuing corporation.
Correct Answer:
A market where corporations sell new securities to raise capital
What components make up common equity in a corporation?
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Common stock, retained earnings, and paid in capital
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Common stock and preferred stock only
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Retained earnings and liabilities
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Total assets and total liabilities
Explanation
Explanation:
Common equity represents the ownership interest of common shareholders in a corporation. It is composed of common stock, retained earnings, and paid-in capital in excess of par. Common stock reflects the initial investment by shareholders, retained earnings are accumulated profits not distributed as dividends, and paid-in capital includes additional contributions from shareholders. Together, these components indicate the total value attributable to common shareholders and their claim on the company’s net assets.
Correct Answer:
Common stock, retained earnings, and paid in capital
What is the formula for calculating the nominal risk-free interest rate?
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Nominal Rate - Inflation-risk premiumrisk-free Interest Rate = Real risk-free Interest
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Nominal risk-free Interest Rate = Real risk-free Interest Rate + Inflation-risk premium
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Nominal risk-free Interest Rate = Inflation-risk premium - Real risk-free Interest Rate
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Nominal risk-free Interest Rate = Inflation-risk premium + Real risk-free Interest Rate
Explanation
Explanation:
The nominal risk-free interest rate represents the return on a risk-free investment without adjustments for inflation. It is calculated by adding the real risk-free interest rate, which reflects the pure time value of money, to the inflation-risk premium, which compensates investors for expected inflation. This ensures that investors receive a return that preserves purchasing power over time.
Correct Answer:
Nominal risk-free Interest Rate = Real risk-free Interest Rate + Inflation-risk premium
Explain how Operating ROA reflects a company's profitability in relation to its total assets. What does this imply about product pricing?
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It shows that higher product prices lead to lower ROA.
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It indicates that efficient use of assets can lead to higher profitability.
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It suggests that total assets have no impact on profitability.
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It means that only cash assets are considered in ROA.
Explanation
Explanation:
Operating Return on Assets (ROA) measures how efficiently a company generates operating profit from its total assets. A higher ROA indicates that the company is effectively utilizing its assets to produce profits. This metric implies that pricing, production efficiency, and asset management are critical: efficient use of assets and optimal product pricing can enhance profitability relative to the investment in total assets, providing insights into operational performance.
Correct Answer:
It indicates that efficient use of assets can lead to higher profitability.
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