Question 1.1. Which of the following statements about the qualitative approach to project risk assessment is(are) most correct? (Points : 3) Qualitative risk assessment involves the answers to a number of yes/no questions. Typically, yes answers are assigned one point and no answers, zero points. The higher the score, the greater the risk. Typically, qualitative risk assessment is used in conjunction with a quantitative risk assessment (instead of in place of a quantitative risk assessment). All of the above statements are correct.
Question 2.2. Which of the following statements about financial risk is incorrect? (Points : 3) Risk requires the possibility of at least one return less favorable than the expected return. Risk requires the possibility of more than one return. Risk is one of the determinants of the project cost of capital (discount rate). The higher the risk, the lower the project cost of capital (discount rate). In financial analyses, investors are assumed to be risk averse.
Question 3.3. In project cash flow estimation, strategic value is defined as the value inherent in projects that are large in comparison to the business’s average project. (Points : 3) True False
Question 4.4. KPI stands for (Points : 3) Kerrigan patient index key patient income key performance indicator key person insurance known performance index
Question 5.5. For investor-owned businesses, a capital investment financial analysis identifies projects expected to contribute to owner (shareholder) wealth. (Points : 3) True False
Question 6.6. An internal rate of return of zero (0 percent) signifies that the project’s cash inflows will (1) be sufficient to recover the project’s costs and (2) earn a return equal to the project’s opportunity cost of capital. (Points : 3) True False
Question 7.7. Because financial statements are based on historical data, financial statement analysis is typically used only to evaluate an organization’s past financial condition. (Points : 3) True False
Question 8.8. Which of the following statements about debt ratings is most correct? (Points : 3) The ratings reflect the probability of default. The ratings on outstanding debt are automatically reviewed and updated annually. The ratings are important to investors but unimportant to issuers. The ratings are based solely on a quantitative analysis of the issuer’s financial condition. The ratings run from A (for the best) to F (for the worst).
Question 9.9. A call provision allows bondholders to tender (turn in) their bonds at any time and receive the principal amount in return. (Points : 3) True False
Question 10.10. In ratio analysis, a single value has little meaning. Therefore, analysts use trend and comparative analyses to “interpret the numbers.” (Points : 3) True False
Question 11.11. Which of the following statements concerning the statement of cash flows is most correct? (Points : 3) Like the balance sheet, the statement of cash flows is as of a single point in time. The statement of cash flows uses information from both the income statement and the balance sheet. The statement of cash flows has five major sections. The most important line on the statement of cash flows is the “bottom line,” the net increase (decrease) in cash. None of the above statements is correct.
Question 12.12. Which of the following statements regarding the cost of equity is(are) most correct? (Points : 3) The cost of debt is the interest rate set on debt financing, while the cost of equity is defined similarly; it is the rate of return required by equity investors. The debt cost plus risk premium method is one way to estimate the cost of equity. The cost of equity for a not-for-profit business is zero. Answers (a) and (b) are correct. Answers (a), (b), and (c) are correct.
Question 13.13. Which of the following statements about cost of capital estimation is most correct? (Points : 3) In general, at least five methods are used to estimate the cost of debt. The corporate cost of capital is the higher of either the cost of equity or the cost of debt. The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization. Because there is no tax savings associated with debt issued by not-for-profit organizations, it is theoretically wrong to recognize the savings for investor-owned businesses. None of the above statements is correct.
Question 14.14. Carlisle Clinic, a not-for-profit organization, reported an equity balance of $1 million on its December 2012 balance sheet. Assuming Carlisle Clinic reported net income of $200,000 for the year that ended December 31, 2012, and had no other adjustments to equity during 2012, what was Carlisle Clinic’s equity balance as of December 31, 2011? (Points : 3) $800,000 $1.2 million $200,000 $1 million Answer cannot be determined on the basis of the information provided
Question 15.15. The best way to incorporate inflation effects in a project’s cash flows is to assume neutral inflation-that is, to assign the same rate of inflation to all cash flows. (Points : 3) True False
Question 16.16. Which of the following statements about financial statement analysis is(are) most correct? (Points : 3) The current ratio measures liquidity. Du Pont analysis is based on the fact that return on equity can be expressed as the sum of three other ratios (Ratio 1 + Ratio 2 + Ratio 3). It is relatively easy to interpret a ratio in the absence of comparative and trend data. Answers (a) and (b) are correct. Answers (a), (b), and (c) are correct.
Question 17.17. Two years ago, you invested $1,000 in a healthcare stock. Your return during the first year was -50 percent, while your return in the second year was +50 percent. Your investment is now worth $1,000. (Points : 3) True False
Question 18.18. The set of rules and regulations that govern the content and format of financial statements is called Government Accounting Procedures (GAP). (Points : 3) True False
Question 19.19. Which of the following statements about income statement expenses is(are) most correct? (Points : 3) Supplies are expensed (shown) on the income statement when purchased. Supplies are expensed (shown) on the income statement when consumed (used to provide patient services). All lease expense is reported on the income statement. Answers (a) and (c) are correct. Answers (b) and (c) are correct.
Question 20.20. What is the present value of a $100 lump sum to be received in five years if the opportunity cost rate is 10 percent? (Points : 3) $62.09 $90.91 $100.00 $110.00 $161.05
Question 21.21. Assume that the value of diagnostic equipment suddenly falls because of technological obsolescence. How is the balance sheet adjusted to preserve the accounting identity? (Points : 3) Short-term liabilities are reduced. Long-term liabilities are reduced. Equity is reduced. Inventories are reduced. Cash is reduced.
Question 22.22. The cost of debt capital to a business is measured by (Points : 3) the maturity date the interest rate the amount borrowed the cost of equity none of the above
Question 23.23. Which of the following equations best describes the accounting identity? (Points : 3) Long-term assets = Short-term assets + Equity. Assets = Liabilities + Equity. Total claims = Liabilities + Equity. Short-term assets = Cash + Receivables. Long-term liabilities = Notes + Bonds.
Question 24.24. Which of the following is not a relevant cash flow when estimating the incremental cash flows for a new hospital service? (Points : 3) The value of floor space needed for the project Revenues from an existing service that would be lost as a result of the new service Shipping and installation costs associated with the new service The cost of a consultant’s report (concerning the feasibility of the service) completed (and paid for) in the previous year An increase in inventory costs that would result if the project is undertaken
Question 25.25. The corporate cost of capital is a blend (weighted average) of the costs of all of a business’s financing sources. (Points : 3) True False
Question 26.26. Fund accounting is used by investor-owned (for-profit) businesses to differentiate between operating funds and retirement funds. (Points : 3) True False
Question 27.27. Which of the following would most likely appear as a liability on the balance sheet of a healthcare organization? (Points : 3) Interest payments made by the healthcare organization on an outstanding loan The outstanding balance on a loan taken by the healthcare organization Salaries owed to employees but not paid as of the balance sheet date The value of investments in stocks and bonds owned by the healthcare organization Answers (b) and (c)
Question 28.28. To minimize the risk associated with debt financing, businesses should finance permanent assets (land, buildings, and equipment) with long-term debt and temporary assets (e.g., a seasonal inventory buildup) with short-term debt. (Points : 3) True False
Question 29.29. Which of the following statements concerning net income versus cash flow is most correct? (Points : 3) Net income is a rough measure of a business’s cash flow. Net income can be converted into a rough measure of cash flow by adding noncash expenses, typically depreciation. Net income can be converted into a rough measure of cash flow by adding nonoperating income. Net income can be converted into a rough measure of cash flow by adding the provision for bad debts. None of the above statements is correct.
Question 30.30. Although sensitivity analysis has its limitations with regard to project risk assessment, it is useful for identifying cash flow components that are most critical to the analysis (i.e., have the largest impact on profitability). (Points : 3) True False
Question 31.31. Which of the following statements about project cash flow estimation is most correct? (Points : 3) Because capital investment analysis involves the price paid for new long-term assets, shipping charges are not considered. If inflation is ignored when estimating a project’s cash flows, the project’s profitability typically will be overstated. The current value of land purchased in the past is not a relevant cash flow because the price paid for the land is a sunk cost. Depreciation expense can be ignored in estimation of project cash flows in not-for-profit organizations. The impact of the project on other project cash flows can be ignored in not-for-profit organizations.
Question 32.32. Basic sources (forms) of capital include which of the following? (Points : 3) Debt Equity Leases Convertible bonds Answers (a) and (b)
Question 33.33. Which of the following statements about project life in capital budgeting analyses is most correct? (Points : 3) In all analyses, project life should reflect the best estimate of the project’s actual life. So that sufficient cash flows are included in the analysis, it is best to add two years to the actual expected life. So that the project is not overvalued, it is best to subtract two years from the actual expected life. If the analysis extends over the project’s expected life, a salvage value cash flow is added to the time line. If truncation of cash flows occurs, it is best to ignore the flows that occur beyond the truncation point.
Question 34.34. Which of the following statements about project classifications is(are) most correct? (Points : 3) Projects are classified by purpose, such as replacement. Projects are classified by size, such as less than $1 million. Projects are classified by life, such as less than five years. Answers (a) and (b) are correct. Answers (a), (b), and (c) are correct.
Question 35.35. Although the use of financial leverage (debt financing) can increase the return to the owners of a business, it also increases the riskiness of their equity investment. (Points : 3) True False
Question 36.36. It is always easy to determine whether a given ratio value is “good” or “bad.” (Points : 3) True False
Question 37.37. In a thorough capital budgeting analysis, once a project cost of capital has been assigned that incorporates any differential project risk, the analyst should rerun the risk analysis to ensure that the new (adjusted) discount rate does not change the results. (Points : 3) True False
Question 38.38. WeCare HMO is evaluating a new project. It has a coefficient of variation (CV) of 5, while the HMO’s average project has a CV of 2-3. The business’s corporate cost of capital is 10 percent, and the typical adjustment for project risk is three percentage points. What is the project cost of capital? (Hint: CV is a measure of project risk.) (Points : 3) 7 percent 10 percent 13 percent 16 percent 19 percent
Question 39.39. The requirement to provide financial accounting information is driven by the need for outside stakeholders (primarily investors) to have reliable information about the financial status of an organization. (Points : 3) True False
Question 40.40. Which of the following statements about the trade-off theory of capital structure is most correct? (Points : 3) The trade-off theory can be used to set a precise optimal structure for any given business. The trade-off theory tells us that businesses should use almost 100 percent debt financing. The trade-off theory tells us that businesses should use almost no debt financing. The trade-off theory tells us that businesses should use some debt financing but not too much. The trade-off theory has no applicability to not-for-profit businesses.
Question 41.41. Consider the following balance sheet: Cash $70,000 Accounts receivable $30,000 Inventories $50,000 Net fixed assets $350,000 Total assets $500,000 Accounts payable $30,000 Long-term debt $20,000 Common stock $200,000 Retained earnings $250,000 Total liabilities and equity $500,000 Assume that the business uses $30,000 of its cash to pay salaries. Which of the following statements reflects the resulting balance sheet change? (Points : 3) There is a change to the left-hand side only. There is a change to the right-hand side only. The cash account decreases by $30,000, and the retained earnings account is reduced by $30,000. The cash account decreases by $30,000, and the long-term debt account is reduced by $30,000. The company does not have the ability to pay $30,000 in salaries.
Question 42.42. Under accrual accounting, all revenues reported on the income statement represent cash collections. (Points : 3) True False
Question 43.43. Although many factors influence the interest rate set on a loan, the two most important are risk and inflation. (Points : 3) True False
Question 44.44. Grady Home Health has a profit margin of 15 percent on sales of $20 million. If the firm has debt of $7.5 million and total assets of $22.5 million, what is Grady’s return on assets? (Points : 3) 13.3 percent 10.9 percent 8.0 percent 5.3 percent 3.1 percent
Question 45.45. Long-term debt is defined as having a maturity of more than six months. (Points : 3) True False
Question 46.46. What is the future value of a $100 lump sum invested for five years in an account paying 10 percent interest? (Points : 3) $62.09 $90.91 $100.00 $110.00 $161.05
Question 47.47. Assume that your organization’s chief financial officer (CFO) has just completed a presentation to the board of trustees concerning the analysis of a proposed ambulatory surgery center costing $2 million. During the presentation, the CFO indicated that the project had a net present value (NPV) of $786,339 and an internal rate of return (IRR) of 17.3 percent. On the basis of its risk, the project was judged to have a cost of capital of 13 percent. Which of the following statements is most correct? (Points : 3) The project is financially acceptable because its NPV is positive. The project is financially acceptable because its IRR is greater than zero. The project is financially unacceptable because its NPV is less than the project’s initial investment cost. The project is financially unacceptable because its IRR is greater than its cost of capital. The project is financially unacceptable, but it may have sufficient social value to make it worthwhile.
Question 48.48. The corporate cost of capital provides a benchmark for determining a project’s cost of capital. In general, projects that are riskier than average must have a cost of capital that is greater than the corporate cost of capital, while projects that are less risky than average must have a cost of capital that is less than the corporate cost of capital. (Points : 3) True False
Question 49.49. Which of the following statements about cash versus accrual accounting is most correct? (Points : 3) In cash accounting, an event is recognized when a cash transaction occurs. In accrual accounting, an event is recognized when a cash transaction occurs. Most large healthcare organizations use cash accounting. Most small healthcare organizations use accrual accounting because it closely matches statements required for income tax purposes. In cash accounting, an event is recognized when the obligation for a cash transaction is created.
Question 50.50. Which of the following statements about opportunity costs is incorrect? (Points : 3) The opportunity cost rate to be applied to any investment is the rate of return that could be earned on alternative investments of similar risk. In general, higher-risk investments should have higher opportunity costs than lower-risk investments have. Opportunity cost rates are normally obtained by examining the returns on securities investments. The opportunity cost rate typically is applied in discounting situations (as opposed to compounding). Say you just inherited $10,000. Because this money cost you nothing, it has an opportunity cost rate of zero.
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