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63 Cards in this Set
- Front
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Which of thefollowing are basic sources (forms) of capital? a) Debt b) Equity c) Leases d) Convertiblebonds e) Botha. and b. above |
E) Both a. and b. above |
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The cost ofdebt capital to a business is measured by the: a) Maturitydate b) Interestrate c) Amountborrowed d) Costof equity e) Noneof the above |
B) Interest Rate |
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Which of thefollowing statements about short-term debt is most correct? a) Short-termdebt has higher issuance costs than long-term debt. b) Short-termdebt has more restrictions (restrictive covenants) than long-term debt.c) Short-termdebt generally has a lower cost than long-term debt. d) Mostshort term debt is obtained by issuing bonds to individuals. e) Allof the above statements are correct. |
C) Short-term debt generally has a lower cost than long-term debt |
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Which of thefollowing statements about debt contracts is most correct? a) Debtcontracts have several different names.b) Debtcontracts typically contain restrictive covenants. c) Alldebt contracts name a trustee. d) Botha. and b. above are correct. e) a.,b., and c. above are all correct. |
D) Both a. and b. above are correct |
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Which of thefollowing statements about debt ratings is most correct? a) Theratings reflect the probability of default.b) Theratings on outstanding debt are automatically reviewed and updated annually.c) Theratings are important to investors, but unimportant to issuers. d) Theratings are based solely on a quantitative analysis of the issuer's financialcondition. e) Theratings run from A (for the best) to F (for the worst). |
A) The ratings reflect the probability of default |
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Which of thefollowing statements about the use of debt financing (financial leverage) isincorrect? a) Inmost situations, the use of debt financing increases the return to owners (say,as measured by ROE). b) Inall situations, the use of debt financing increases the riskiness to owners. c) Capitalstructure theory allows managers to precisely determine the optimal capitalstructure for any for-profit business. d) Debtfinancing allows more of a business's operating income to flow through toinvestors.e) Becausedebt financing "levers up" (increases) owners' returns, its use iscalled financial leverage. |
C) Capital structure theory allows managers to precisely determine the optimal capital structure for any for-profit business |
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Which of thefollowing factors influence the estimate of a business's optimal capitalstructure? a) Theamount of business (inherent) risk b) Lender/ratingagency attitudes c) Industryaverages d) Theneed to maintain financial flexibility (reserve borrowing capacity) e) Allof the above factors influence the estimate |
E) All of the above factors influence the estimate |
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Which of thefollowing statements about cost of capital estimation is most correct?a) Ingeneral, at least five methods will be used to estimate the cost of debt. b) Thecorporate cost of capital is the higher of either the cost of equity or thecost of debt. c) Thecorporate cost of capital is used as the hurdle (discount) rate for allprojects being evaluated in the organization. d) Becausethere is no tax savings associated with debt issued by not-for-profitorganizations, it is theoretically wrong to recognize the savings for investor-ownedbusinesses. e) Noneof the above statements are correct./bqha |
E) None of the above statements are correct |
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Which of thefollowing statements regarding the cost of equity is most correct? a) Thecost of debt is the interest rate set on debt financing, while the cost ofequity is defined similarly; it is the rate of return required by equityinvestors. b) Thedebt cost plus risk premium method is one way to estimate the cost of equity. c) Thecost of equity for a not-for-profit business is zero. d) Botha. and b. above are correct. e) a.,b., and c. above are correct. |
D) Both a. and b. above are correct |
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GenericHealth Services has a target capital structure of 30 percent debt and 70percent equity. Its cost of debt estimate is 10 percent and its cost of equityestimate is 16 percent. It pays federal, state, and local taxes at a 40 percentmarginal rate. What is the firm's corporate cost of capital? a) 6.0% b) 10.0% c) 13.0% d) 14.2% e) 16.0% |
C) 13.0 % |
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Although manyfactors influence the interest rate set on a loan, the two most important arerisk and inflation. a) True b) False |
A) True |
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Long-termdebt is defined as having a maturity of more than six months. a) True b) False |
B) False |
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Althoughthe use of financial leverage (debt financing) can increase the return to theowners of a business, it also increases the riskiness of their equityinvestment. a) True b) False |
Might or might not be on final |
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To minimizethe risk associated with debt financing, permanent assets (land, buildings, andequipment) should be financed with long-term debt while temporary assets (suchas a seasonal buildup in inventories) should be financed with short-term debt. a) True b) False |
A) True |
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The corporatecost of capital is a blend (weighted average) of the costs of all of abusiness's financing sources (excluding equity).a) True b) False |
B) False |
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The corporatecost of capital provides a benchmark for determining a project's cost ofcapital. In general, projects that are riskier than average must have a cost ofcapital that is higher than the corporate cost of capital, while projects thatare less risky than average must have a cost of capital that is less than thecorporate cost of capital. a) True b) False |
A) True |
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Which of the following statements about projectclassifications is most correct? a) Projects are classified by purpose,such as replacement projects. b) Projects are classified by size,such as less than $1 million. c) Projects are classified by life,such as less than 5 years. d) Both a. and b. above are correct. e) a., b., and c. above are correct. |
D) Both a. and b. above are correct |
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Which of the following are steps in a capital investmentfinancial analysis? a) Estimate the project's cash flows. b) Assess the project's riskiness. c) Estimate the project cost of capital(discount rate). d) Measure the financial impact. e) All of the above. |
E) All of the above |
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Which of the following statements about payback (paybackperiod) is most correct? a) Payback is a measure of timebreakeven.b) Payback is a rough measure of risk. c) Payback is a rough measure ofliquidity. d) Both a. and b. above are correct. e) a., b., and c. above are correct. |
E) a,b, and c above are correct |
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What is the present value of a 100 dollar lump sum to bereceived in 5 years if the opportunity cost rate is 10 percent? a) $ 62.09 b) $ 90.91 c) $100.00 d) $110.00 e) $161.05 |
A) $62.09 |
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What is the future value of a $100 dollar lump sum investedfor 5 years in an account paying 10 percent interest? a) $ 62.09 b) $ 90.91 c) $100.00 d) $110.00 e) $161.05 |
E) $161.05 |
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As the discount rate applied to a single amount future valueincreases, the present value: a) stays the same. b) increases by some amount. c) doubles. d) decreases. e) There is not enough information toanswer this question. |
D) decreases |
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Which of the following statements about opportunity costs isincorrect? a) The opportunity cost rate to beapplied to any investment is the rate of return that could be earned onalternative investments of similar risk. b) In general, higher-risk investmentsshould have higher opportunity costs than lower-risk investments. c) Opportunity cost rates are normallyobtained by examining the returns on securities investments. d) The opportunity cost rate typicallyis applied in discounting situations (as opposed to compounding). e) Say you just inherited $10,000. Becausethis money cost you nothing, it has an opportunity cost rate of zero. |
E) Say you just inherited $10,000. Because this money cost you nothing, it has an opportunity cost rate of zero |
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Assume that your organization's CFO has just completed apresentation to the board of trustees concerning the analysis of a proposedambulatory surgery center costing $2 million. During the presentation, the CFOindicated that the project had an NPV of $786,339 and an IRR of 17.3 percent.Based on its risk, the project was judged to have a cost of capital of 13percent. Which of the following statements is most correct? a) The project is financially acceptablebecause its NPV is positive. b) The project is financiallyacceptable because its IRR is greater than zero. c) The project is financiallyunacceptable because its NPV is less than the project's initial investmentcost. d) The project is financiallyunacceptable because its IRR is greater than its cost of capital. e) The project is financiallyunacceptable, but it may have sufficient social value to make it worthwhile. |
A) The project is financially acceptable because its NPV is positive |
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The internal rate of return (IRR) of a capital investment: a) Changes when the cost of capitalchanges. b) Must exceed the project cost of capitalto make the investment financially acceptable.c) Measures the dollar profitability ofa project. d) Must be less than the project costof capital to make the investment financially acceptable. e) Measures the length of time that it takes abusiness to recover its initial investment in the project |
B) Must exceed the project cost of capital to make the investment financially acceptable |
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Return on investment (ROI) can be measured in either adollar basis or a rate of return basis. Which of the following statements aboutROI is incorrect? a) Net present value (NPV) is a dollarreturn measure. b) IRR is a rate of (percentage) returnmeasure. c) ROI measures use time value of moneyconcepts. d) The calculation of IRR requires theproject cost of capital (discount rate). e) The calculation of NPV requires theproject cost of capital (discount rate). |
D) The calculation of IRR requires the project cost of capital (discount rate). |
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Which of the following statements about capital investmentanalysis is most correct? a) Although a useful accountingconcept, breakeven analysis has no role in capital investment analysis. b) Net present value (NPV) measures aproject's rate of return while internal rate of return (IRR) measures aproject's dollar return.c) An NPV of zero indicates that theproject is expected to return the amount of the initial investment, but it willnot provide a return on that investment. d) On most projects, the NPV and IRRmeasures will give conflicting results, so managers must use judgment as towhich measure to use. e) Payback measures the length of time ittakes to recover the initial investment in the project. |
E) Payback measures the length of time it takes to recover the initial investment in the project |
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For investor-owned businesses, a capital investmentfinancial analysis identifies those projects that are expected to contribute toowner (shareholder) wealth. a) True b) False |
A) True |
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Two years ago, you invested $1,000 in a healthcare stock.Your return during the first year was -50 percent, while your return in thesecond year was +50 percent. Your investment is now worth $1,000. a) True b) False |
B) False |
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If a bank pays quarterly compounding on its savingsaccounts, the stated (nominal) rate will be greater than the effective annualrate (EAR).a) True b) False |
B) False |
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Which of the following statements about project cash flowestimation is incorrect? a) Inflation effects should beincluded. b) The effects on a business's otherprojects should be included. c) Opportunity costs should beincluded. d) Sunk costs should be included. e) Strategic value should be included. |
D) Sunk costs should be included |
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Which of the following is not a relevant cash flow whenestimating the incremental cash flows for a new hospital service? a) The value of floor space needed forthe project. b) Revenues from an existing servicethat would be lost as a result of the new service.c) Shipping and installation costsassociated with the new service. d) The cost of a consultant's reportconcerning the feasibility of the service that was completed (and paid for) inthe previous year. e) An increase in inventory costs thatwould result if the project is undertaken. |
D) The cost of a consultant's report concerning the feasibility of the service that was completed (and paid for) in the previous year |
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A medical group practice is considering offering a newservice with risk that is greater than the current risk of the business. Inevaluating this investment, the decision-maker should: a) Increase the IRR of the project to reflectthe greater risk. b) Increase the NPV of the project toreflect the greater risk. c) Reject the project, because itsacceptance would increase the risk of the business. d) Ignore the risk differential if theproject represents only a small fraction of the total assets of the firm. e) Increase the cost of capital applied tothe project to make it higher than the business's corporate cost of capital. |
E) Increase the cost of capital applied to the project to make it higher than the business's corporate cost of capital |
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WeCare HMO is evaluating a new project. It has a coefficientof variation (CV) of 5, while the HMO's average project has a CV of 2-3. Thebusiness's corporate cost of capital is 10 percent and the typical adjustmentfor project risk is 3 percentage points. What is the project cost of capital? a) 7% b) 10% c) 13% d) 16% e) 19% |
C) 13% |
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Which of the following statements about the qualitativeapproach to project risk assessment is most correct? a) Qualitative risk assessment involvesthe answers to a number of yes/no questions. b) Typically, yes answers are assignedone point and no answers zero points. c) The higher the score, the greaterthe risk.d) Typically, qualitative riskassessment is used in conjunction with a quantitative risk assessment (asopposed to in place of a quantitative risk assessment). e) All of the above statements arecorrect |
E) All of the above statements are correct |
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Which of the following items are part of a business'set of financial statements? a) Income statement b) Balance sheet c) Statement of cash flows d) Both a. and b. above e) a., b., and c. above |
E) a,b, and c above |
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Which of thefollowing statements about cash versus accrual accounting is most correct? a) In cash accounting, an event isrecognized when a cash transaction occurs.b) In accrual accounting, an event isrecognized when a cash transaction occurs.c) Most large healthcare organizationsuse cash accounting. d) Most small healthcare organizationsuse accrual accounting because it closely matches statements required forincome tax purposes.e) In cash accounting, an event isrecognized when the obligation for a cash transaction is created. |
A) In cash accounting, an event is recognized when a cash transaction occurs |
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Which of thefollowing statements about the income statement is most correct? a) It has several alternative names,including the statement of liabilities. b) It reports the financial status ofan organization as of a single point in time. c) It reports the economic profitabilityof an organization. d) Its three major sections areoperating costs, nonoperating costs, and total (net) costs. e) Income statements are alwaysprepared annually, but never for shorter periods (for example, quarterly). |
C) It reports the economic profitability of an organization |
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Which of thefollowing statements about gross and net patient service revenue is mostcorrect? a) Gross revenue reports revenue basedon chargemaster prices. b) Net revenue is gross revenue lessdiscounts and charity care. c) Net revenue is gross revenue lessdiscounts, charity care, and bad debt losses.d) Both a. and b. above are correct e) Both a. and c. above are correct. |
D) Both a and b above are correct |
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Which of thefollowing statements about income statement expenses is most correct?a) Supplies are expensed (shown) on theincome statement when purchased. b) Supplies are expensed (shown) on theincome statement when consumed (used to provide patient services). c) All lease expense is reported on theincome statement. d) Both a. and c. above are correct. e) Both b. and c. above are correct.a |
E) Both b and c above are correct |
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Which of thefollowing statements concerning depreciation expense is most correct? a) Depreciation expense accounts forthe loss of value of inventory. b) Depreciation expense accounts forthe loss of value of securities investments. c) Depreciation expense accounts for theloss of value of fixed assets (plant and equipment). d) For accounting purposes,depreciation expense is calculated by the double declining balance method. e) For accounting purposes,depreciation expense is calculated by the triple declining balance method. |
C) Depreciation expense accounts for the loss of value of fixed assets (plant and equipment) |
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Which of thefollowing statements concerning net income is most correct? a) Net income is the "bottomline" of the income statement. b) Net income measures totalprofitability as defined by accounting rules and regulations. c) In not-for-profit businesses, theentire amount of net income is reinvested in the business. d) Both a. and b. above are correct. e) a., b., and c. above are correct. |
E) a, b, and C above are correct |
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Which of thefollowing statements concerning net income versus cash flow is most correct? a) Net income is a rough measure of abusiness's cash flow. b) Net income can be converted into arough measure of cash flow by adding noncash expenses, typically depreciation. c) Net income can be converted into arough measure of cash flow by adding nonoperating income. d) Net income can be converted into arough measure of cash flow by adding the provision for bad debts. e) None of the above statements are correct |
B) Net income can be converted into a rough measure of cash flow by adding non-cash expenses, typically depreciation |
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Therequirement to provide financial accounting information is driven by the needfor outside stakeholders (primarily investors) to have reliable informationabout the financial status of an organization. a) True b) False |
A) True |
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The set ofrules and regulations that govern the content and format of financialstatements is called Government Acceptable Procedures (GAP). a) True b) False |
B) False |
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Which of thefollowing statements about the organization of the balance sheet is mostcorrect? a) The balance sheet has upper andlower (or left and right) sections. b) Assets are divided into current andlong-term categories. c) Assets are divided into equity andnon-equity categories. d) Both a. and b. above are correct. e) Both a. and c. above are correct. |
D) Both a and b above are correct |
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Which of thefollowing equations best describes the accounting identity? a) Long-term assets = Short-term assets+ Equity b) Assets = Liabilities + Equity c) Total claims = Liabilities + Equity d) Short-term assets = Cash +Receivables e) Long-term liabilities = Notes +Bonds. |
B) Assets=Liabilities + Equity |
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Which of thefollowing statements about the balance sheet is most correct? a) The lower (right-hand) sectionreports cash and other assets. b) The balance sheet reports on abusiness's operations. c) The asset side of the balance sheetis listed in decreasing order of maturity (i.e., longer maturity assets arelisted first). d) The upper (left-hand) sectionreports liabilities and equity. e) None of the above statements arecorrect. |
E) None of the above statements are correct |
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Which of thefollowing statements concerning accumulated depreciation is most correct?a) Accumulated depreciation is anincome statement item. b) There is no relationship betweendepreciation expense on the income statement and accumulated depreciation onthe balance sheet. c) Net fixed assets is equal to grossfixed assets plus accumulated depreciation. d) Accumulated depreciation appears onthe balance sheet under the category "Other Assets." e) None of the above statements iscorrect. |
E) None of the above statements is correct |
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Which of thefollowing statements concerning the statement of cash flows is most correct?a) Like the balance sheet, thestatement of cash flows is as of a single point in time. b) The statement of cash flows usesinformation from both the income statement and the balance sheet. c) The statement of cash flows has fivemajor sections. d) The most important line on thestatement of cash flows is the "bottom line," the net increase(decrease) in cash. e) None of the above statements iscorrect. |
B) The statement of cash flows uses information from both the income statement and the balance sheet |
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Assume that abusiness's balance sheet reports total assets of $500,000 and total liabilitiesof $300,000. Now assume that $20,000 of net fixed assets (net plant andequipment) are written off due to technological obsolescence. All else thesame, what is the total equity of the business after the write-off? a) $200,000 b) $190,000 c) $180,000 d) $170,000 e) There is insufficient informationgiven to answer this question. |
C) $180,000 |
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Consider the following balance sheet: Cash $70,000...AR $30,000...Inventories 50,000...Net fixed assets 350,000...Total Assets $500,000-------AP $ 30,000...Long-term debt 20,000...Common stock 200,000...Common stock 200,000...Retained earning 250,000...Total Claims $500,000 Assume thatthe business uses $10,000 of its cash to pay for supplies that were ordered oncredit terms and have already been received and booked (recorded on the balancesheet). Which of the below statements reflects the resulting balance sheetchange? a) There is a change to the left-handside only. b) There is a change to the right-handside only. c) The cash account decreases by$10,000 and the retained earnings account decreases by $10,000. d) The cash account decreases by $10,000and the accounts payable account decreases by $10,000. e) The cash account decreases by$10,000 and the supplies account increases by $10,000.f) The company does not have theability to pay $30,000 in salaries. |
D) The cash decreases by $10,000 and the accounts payable account decreases by $10,000 |
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Like theincome statement, the balance sheet reports the assets and liabilities of anorganization over some period of time. a) True b) False |
B) False |
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Which of the following statements aboutfinancial condition analysis is most correct?a) Financial conditionanalysis focuses on whether or not an organization has the financial capacityto accomplish its mission.b) Financial conditionanalysis often results in a list of financial strengths and weaknesses.c) Financial statementanalysis uses data contained in an organization's financial statements toassess financial condition. d) Operating analysis usesoperating data to explain financial condition. e) All of the above statements are correct. |
E) All of the above statements are correct |
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Which of the followingstatements about financial statement analysis is most correct?a) The current ratio measures liquidity. b) Du Pont analysis isbased on the fact that return on equity (ROE) can be expressed as the sum ofthree other ratios (Ratio 1 + Ratio 2 + Ratio 3). c) It is relatively easy tointerpret a ratio in the absence of comparative and trend data.d) Both a. and b. above arecorrect. e) a., b., and c. above arecorrect. |
A) The current ratio measures liquidity |
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Which of the followingstatements about the limitations of financial condition analysis is mostcorrect? a) Comparison with industryaverages is difficult if the organization operates in several different linesof business. b) Seasonal factors candistort ratios. c) Inflation effects candistort ratios. d) Both a. and b. above arecorrect. e) a., b., and c. above are correct.rh |
E) a,b, and c above are correct |
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KPI stands for: a) Kerrigan patient index b) Key patient income c) Key performance indicator d) Key person insurance e) Known performance index |
C) Key performance indicator |
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Grady Home Health has aprofit margin of 15 percent on sales of $20,000,000. If the firm has debt of$7,500,000 and total assets of $22,500,000, what is Grady's return on assets(ROA)? a) 13.3% b) 10.9% c) 8.0% d) 5.3% e) 3.1% |
A) 13.3 % |
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A fire has destroyed alarge percentage of the financial records of the Carter Health System. You havethe task of piecing together information to prepare a financial report. Youhave found the profit margin to be 5.4 percent. If sales were 4 million dollarson total assets of 2 million dollars, and the amount of debt financing was800,000 dollars, what was Carter's return on equity (ROE)? (Hint: Use the DuPont equation to answer this question.)a) 13.8% b) 18% c) 19.2% d) 21.6% e) 25.8% |
B) 18% |
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White Memorial Hospitalhas a debt-to-equity ratio of 0.67. What is the hospital's debt ratio?a) 10% b) 20% c) 30% d) 40% e) 50% |
D) 40% |
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In ratio analysis, asingle value has little meaning. Therefore analysts use trend and comparativeanalyses to help "interpret the numbers." a) True b) False |
A) True |
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The primary differencebetween financial statement analysis and operating analysis is that operatinganalysis does not use benchmarking while financial statement analysis does. a) True b) False |
B) False |
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It is always quite easyto determine whether a given ratio value is "good" or"bad." a) True b) False |
B) False |
