TMA Introduction to Business 4 — Questions and Answers
Question 1: Which of the following best defines 'gross profit margin'?
- Net income divided by total revenue
- (Revenue minus cost of goods sold) divided by revenue (Correct answer)
- Operating income divided by total assets
- Revenue minus all operating expenses
Correct answer: (Revenue minus cost of goods sold) divided by revenue
Gross profit margin measures the percentage of revenue remaining after subtracting the direct cost of producing goods or services.
Question 2: A turnaround professional is hired to assess a distressed manufacturer. Their FIRST priority should be:
- Renegotiating long-term supplier contracts
- Stabilizing cash flow and securing immediate liquidity (Correct answer)
- Developing a five-year strategic plan
- Replacing the entire management team
Correct answer: Stabilizing cash flow and securing immediate liquidity
Stabilizing cash flow is always the first step in a turnaround to stop the bleeding and buy time for deeper restructuring.
Question 3: What is 'accounts receivable days' (DSO) used to measure?
- How quickly a company pays its suppliers
- The average number of days it takes to collect payment from customers (Correct answer)
- The number of days inventory sits before being sold
- The time required to close monthly financial books
Correct answer: The average number of days it takes to collect payment from customers
Days Sales Outstanding (DSO) measures the efficiency of a company's credit and collection process.
Question 4: Which business theory suggests that a company should focus on its core competencies and outsource non-essential activities?
- Porter's Five Forces
- Core Competency Theory (Prahalad & Hamel) (Correct answer)
- Balanced Scorecard
- Blue Ocean Strategy
Correct answer: Core Competency Theory (Prahalad & Hamel)
Prahalad and Hamel's Core Competency Theory argues companies should build advantage around distinctive internal capabilities and outsource the rest.
Question 5: In a Chapter 11 bankruptcy, a 'DIP loan' refers to:
- A debt instrument purchased by distressed investors at a discount
- Debtor-in-Possession financing that funds operations during the reorganization (Correct answer)
- A dividend distribution to preferred shareholders
- A direct infusion of equity from existing shareholders
Correct answer: Debtor-in-Possession financing that funds operations during the reorganization
DIP (Debtor-in-Possession) financing gives bankrupt companies access to new capital during reorganization, typically with super-priority lien status.
Question 6: What does 'leverage' mean in a corporate finance context?
- The ability to negotiate favorable supplier terms
- The use of debt to amplify potential returns (and risks) (Correct answer)
- A company's market share relative to competitors
- The ratio of fixed costs to variable costs
Correct answer: The use of debt to amplify potential returns (and risks)
Financial leverage refers to the use of borrowed capital, which magnifies both gains and losses relative to equity invested.
Question 7: A company's 'burn rate' refers to:
- The rate at which inventory becomes obsolete
- The monthly rate at which a company spends its cash reserves (Correct answer)
- The speed of accounts receivable collection
- The frequency of asset write-downs
Correct answer: The monthly rate at which a company spends its cash reserves
Burn rate measures how quickly a company is depleting its cash reserves, critical for assessing how long it can survive without new revenue or financing.
TMA Introduction to Business 4
Which of the following best defines 'gross profit margin'?