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| Section | Objectives |
|---|---|
| Financial Management Concepts | - Financial Markets and Institutions
|
| Working Capital Management | - Current Asset Management
|
| Capital Budgeting | - Cash Flow Estimation
|
| Cost of Capital and Capital Structure | - Leverage and Capital Structure
|
| Time Value of Money | - Present and Future Value
|
| Financial Statement Analysis | - Ratio Analysis
|
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NEW QUESTION # 43
What is a primary benefit of maintaining inventory?
Answer: A
Explanation:
A primary benefit of maintaining inventory is that it allows a company to meet customer demand promptly and consistently. Inventory ensures that goods are available when customers want them, which supports sales, customer satisfaction, and competitive performance. Without adequate inventory, firms face stockouts that may lead to lost sales, damaged customer relationships, and reduced market share. Financial management recognizes that although inventory carries costs such as storage, insurance, obsolescence, and tied-up capital, it also provides important operational and strategic benefits. Choice D is correct because inventory exists largely to support uninterrupted operations and customer service. Choice A is incorrect because increasing the cash conversion cycle is generally a cost, not a benefit. Choice B is incorrect because simply holding inventory does not automatically decrease cost of goods sold. Choice C is also incorrect because maintaining inventory usually increases, rather than reduces, storage costs. Therefore, D is the correct answer because the main reason firms hold inventory is to ensure product availability and fulfill customer demand in a timely manner while supporting stable operations.
NEW QUESTION # 44
What is the bid-ask spread?
Answer: B
Explanation:
The bid-ask spread is a fundamental concept in capital markets that reflects market liquidity and transaction costs. Thebid priceis the highest price a buyer (or market maker/specialist) is willing to pay for a security, while theask priceis the lowest price at which a seller is willing to sell. The difference between these two prices is the bid-ask spread. From a financial management perspective, the spread compensates market makers for providing liquidity, bearing inventory risk, and facilitating continuous trading. A narrow bid-ask spread generally indicates a highly liquid security with strong trading volume and low transaction costs, while a wide spread suggests lower liquidity, higher risk, or limited information availability. Investors effectively pay the spread when buying or selling securities, making it an implicit cost of trading. This concept is critical when evaluating market efficiency, trading strategies, and execution costs, especially for large institutional trades. Option D correctly defines the bid-ask spread as the difference between buying and selling prices quoted by specialists or dealers.
NEW QUESTION # 45
What does a beta higher than 1.0 for a stock indicate about its systematic risk?
Answer: B
Explanation:
Beta measures a stock's sensitivity to movements in the overall market and represents its level of systematic (non-diversifiable) risk. A beta greater than 1.0 indicates that the stock tends to move more than the market in response to market-wide changes. For example, if the market increases by 1%, a stock with a beta of 1.2 is expected, on average, to increase by approximately 1.2%. Conversely, it would also decline more sharply during market downturns. From a capital market theory perspective, higher beta implies higher risk and therefore a higher required rate of return to compensate investors.
Financial managers use beta in the Capital Asset Pricing Model (CAPM) to estimate the cost of equity.
Option B correctly describes the implication of a beta greater than one.
NEW QUESTION # 46
How does the global bond market impact the strategies of multinational corporations?
Answer: A
Explanation:
Multinational corporations (MNCs) often seek the lowest-cost and most flexible sources of long-term financing. The global bond market expands their choices beyond domestic lenders and investors, enabling firms to issue debt in multiple countries, currencies, and structures (fixed vs. floating rates, maturities, secured vs. unsecured, and different covenant packages). This broad access can reduce the weighted average cost of capital (WACC) if foreign markets provide lower yields, deeper investor demand, or better terms for the issuer's credit profile. Global issuance can also support operational needs: an MNC earning revenues in euros or yen may issue bonds in those currencies to create a natural hedge, matching debt service with foreign-currency cash inflows and reducing exchange-rate exposure. However, the global bond market does not remove currency risk automatically (so B is incorrect), nor does it guarantee fixed interest rates (D is incorrect). While domestic issuance remains important, global markets increase strategic flexibility, allowing firms to optimize capital structure, diversify funding sources, manage refinancing risk, and tailor financing to geographic cash flows-core themes in international financial management.
NEW QUESTION # 47
Which factor should be considered when valuing preferred stock?
Answer: A
Explanation:
Preferred stock is generally valued based on its fixed dividend payment rather than on expected growth in dividends or significant capital appreciation. In most cases, preferred shares promise a stated dividend amount or a dividend based on a fixed rate applied to par value. Because these dividends are usually constant and do not grow like common stock dividends may, preferred stock is often valued using the perpetuity concept:
Value = Annual Preferred Dividend ÷ Required Rate of Return. This makes the fixed dividend rate the key factor in valuation. Choice B is incorrect because past price alone does not determine intrinsic value. Choice C is incorrect because preferred stock usually offers limited capital appreciation compared with common stock. Choice D is also incorrect because preferred dividends typically do not grow at a variable rate. From a financial management perspective, preferred stock is often viewed as a hybrid security, combining features of both debt and equity. Its valuation depends primarily on the stability and amount of the dividend stream and the return required by investors. Therefore, A is the correct answer because the fixed dividend rate is central to determining preferred stock value.
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NEW QUESTION # 48
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