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BUNDLE OF WGU C214 QUESTION AND ANSWER 2023
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WGU C214 Financial Management OA Study Set QUESTION AND ANSWER RATED A
Trading on the NYSE is executed without a specialist (i.e. a market maker). True or False? False Stocks and Bonds are two types of financial instru... [Show More] ments. True or False? True When revenue is matched with cost of sales in an Income statement it is called? Matching principle Basic balance sheet equation is what? Equity = Assets - Liabilities Why is the balance sheet known as the permanent statement? Because the other statements are reset at the end of the fiscal year. How do you calculate the change in retained earnings? Net income-dividends Sales - Cost of Sales - other expenses = Operating Income or EBiT Name four accounts that are part of total assets? Cash, Accounts receivable, inventory, long term assets Name three accounts that are part of total liabilities? Bonds, accounts payable and mortgage Name four accounts that are part of current assets? Inventory, cash, accounts receivable and short term investments. Name three accounts that are only included in cash flow from financing? Common stock, dividends paid and bonds payable Define the statement of cash flows? Calculated for the same period of time as the incomes statement is calculated based on the income statement and changes in the balance sheet is one of the three basic accounting statements. When fixed assets increase what happens to cash? Cash will decrease What is the purpose of the statement of cash flows? Explains the change in cash over the course of the specified time frame. Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? The firm has too little inventory resulting in lost sales or stock-outs. If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? Higher The Operating Income Return on Investment (OIROI) uses what elements on the income statement? EBIT and total assets Why would a company be interested in the Total Asset Turnover (TAT) ratio? To see how efficient are at producing sales What annual interest will be paid for a zero coupon bond? 0% What is the most significant characteristic of subordinated debt? Senior debt is paid off first If a company wants to increase its debt capital, how will they raise the funds? Sell bonds What is the lowest level investment bond BBB What can cause the bond price to fluctuate? A change in the bond rating, a change in the financial condition, general change in interest rates. What does a company use as security for a bond? Credit worthiness Under the efficient market hypothesis, what will companies endeavor to do? Maximize profits for a given level of risk What does the beta coefficient represent? It is a statistically derived measure of volatility. If an investor knows the idiosyncratic risk, the investor knows the? Beta Coefficient Why is the depreciation expense taken out of the net income calculation, yet added back at the end? Because depreciation expense is tax deductible. Why would we reject a project based on NPV? The NPV is a negative number Why would we reject a project based on IRR? The discount rate is higher than the IRR What are two key elements of differential cash flow? Depreciation expense and net income Why is the NPV preferred over the IRR? It measures the dollar value and is more reliable. When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability? Higher leverage leads to higher profitability for a given sale level. What does the degree of financial leverage indicate? The reliance on debt If a company has a high degree of financial leverage, what does that tell us about the firms risk profile? Financial leverage also means that more financing is done through debt, not equity. Higher profits to shareholders. What is the cash cycle? The amount of time to regenerate cash. [Show Less]
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C214 WGU Dr. V's Webinar QUESTION AND ANSWER 2023
Elements of Financial Statements (8 Questions) Revenue Expenses Income Assets Liabilities Equity Revenue Amount generated by sale of products... [Show More] and services Expenses Amount incurred to manufacture products Income The difference between revenues and expenses Liabilities Amounts owed by the company to others Equity Amounts invested in the company by shareholders Income Statement (recorded in two methods) Accrual Principal = Revenue must be recorded the moment the has delivered the goods or services to the customer. The earning process (the moment you sell, you've completed the earning process) is complete and thus must record. The moment company incurs an expense, they must record it in the income state. Matching Principal = All expenses necessary to manufacture a product in respective to whether cash is paid or not must be recorded in the income statement as expense. What is included in the income statement and not included in the statement of cash flows? Depreciation Expense = the using of machine and equipment to manufacture the product. Must be recorded in the income statement as a result of the matching principle (cash will never be paid for it as a result of the matching principle). Statement of Retained Earnings How much of income a company earns every year is distributed to stock holders as dividends and how much of that income is retained by the company to grow the company in the future. Dividend Always paid out of income What is Coupon Rate? Is the interest rate that a company promises to pay on bonds. What is Market Rate? Is the interest rate on other comparable bonds. In order words, what other companies are paying. Market Rate is equal to what? Is equal to yield to maturity (YTM) What is Par Value? Is the amount payable on maturity of the bond. GGM: Gordon Growth Model Assumes stable growth rates and does not incorporate risk. Think about Efficient Frontier CAPM Model: Capital Asset Pricing Model Allows to determine expected return on stocks and incorporate risk. Pubic companies maximizes Maximizes shareholder value by maximizing earnings per share. Private companies maximizes Maximizes shareholder value by keeping control within the company. Positive credit rating impact It lowers the cost of capital. A downgrade in credit rating will increase the cost of capital. Cash flow from operating activities Are cash flows generated for sale of products and services to customers. Formula for Retained Earnings Ending RE = Beginning RE + Net Income - Dividends Estimates are? Depreciation and salvage value on an asset. An example of ACCOUNTING Difference is Companies using different accounting methods. An example of TIMING Difference is Companies using different fiscal years. Voting Rights Only shareholders have voting rights. What is included in Initial Outlay (IO) of Cash Budgeting. Purchase price of new equipment, shipping cost, and investment in working capital. Risks associated with debt financing Too much debt can lead to bankruptcy. Inventory Related costs includes ... Production costs, storage costs, and opportunity costs. SEC requires all publically traded companies to do what annually? Every publically traded company is required to file Annual audited statements to the SEC. Issues with foreign financial statements Use international financial reporting standards and they are different from the US accounting standards. CFI measure what? CFI measures investments in long term assets such as building, equipment, and machinery. Efficient Frontier Maximizes expected return for a given level of risk. What does the efficient Frontier measure? It maximizes expected return for a given level of risk. (Think about the graph) Objective of Portfolio diversification? The objectives of Portfolio diversification reduces risk. Current Assets are? Current assets are cash or any other asset that can be converted to cash within 12 months. Current Liabilities Are liabilities that a has to be paid within 12 months. Differential Annual Cash Flow Is net cash flow generated by a new asset on a yearly basis. Current Ratio Measures short term liquidity to pay short term obligations. SEC regulates... The SEC regulates public disclosures of entities that sell debt and equity to the public Increased Frequency in compounding leads to what? Increase frequency in compounding leads to an increase in APY Treasury bonds Are taxed at a federal level while municipal bonds are tax free. Two benefits of unbundling and offshoring 1. It reduces the costs and results in higher sales and employment. 2. Allows for sale of intermediate and final goods at lower prices and increases employment. Two basic types of financial instruments Stocks and bonds Primary markets Are where companies directly sells securities to investors (IPO: I Secondary markets Securities are sold from third parties such as the NYSE or Nasdaq. When do companies not need permission from SEC to sell debt and equity? 1. Regulation S: when they sell to foreign investors. 2. Rule 144A: when they sell to a large institutional investor. Dodd-Frank Act (2009 After 2008 Financial Crises regulates the banking industry) Dodd-Frank created the Financial Stability Oversight Council, does an annual stress test on banks. Volcker Rule Limits investment in hedge funds by banks. Sarbanes-Oxley Act (2002 after massive fraud) Requires companies to Have strong internal audit controls, prepare honest and accurate financial statements. FINRA (Financial Industry Regulatory Authority) Regulates US stock brokers also need to maintain up to date sales records. Foreign Corrupt Practices Act 1977 (FCPA) Prohibits bribing of foreign officials. DFL: Degree of Financial Leverage Is a ratio that measures the sensitivity of a company's earnings per share to fluctuations in its operating incomes, as a result of changes in its capital structure. Earnings per Share (EPS) Is a portion of a company's profit allocated to each outstanding share of common stock. It serves as an indicator of a company's profitability. What does the Degree of Financial Leverage Indicate? The reliance on debt. DOL: Degree of Operating Leverage aka Business Risk The more fixed costs a company has in its operating structure, the more fixed costs they would have, sometimes called business risk. is a measure used to evaluate how a company's operating income changes with respect to a percentage change in its sales. ... A company with a high degree of operating leverage has high fixed costs relative to its variable costs. Example of DOL meaning a DOL of 2.5 means that if there is a 1% increase/decrease in Sales, will lead to a 2.5% increase/decrease in EBIT. Working Capital Management: Short Term Liquidity refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. [Show Less]
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WGU C214 Finance Management PVCC QUESTION AND ANSWER WELL SOLVED
How can a private firm appropriately maximize shareholder value? By making decisions that keep the control of the business with the owners Why are ... [Show More] American regulators focused on international investing in a global marketplace? Because international investing in a global marketplace is the concern of American investors What is one of the two basic types of financial instruments? Bonds Which two effects does the unbundling and offshoring of production have on employment when the global value chain is taken into consideration? Unbundling and offshoring allows firms to offer intermediate and final goods at lower prices, thus increasing employment. Unbundling and offshoring decreases costs, which results in expansion of sales and higher employment What is true about the content and structure of a balance sheet? It reports the assets, liabilities, and equity at a point in time A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from the operating activities section? The change will decrease cash flows from operations by $5,000 Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes? Revenues and expenses are always recognized in the same period for accounting income purposes and income for tax purposes What is the basic equation for a balance sheet? Assets=liabilities+equity What do cash flows from investing activities generally relate to? A firm's purchase and sale of long-term assets Which transaction is reflected in cash flow from operating activities? Cash sales to customers What does free cash flow represent? Cash available for distribution after funding required reinvestment An analyst is comparing the ratios of two different firms and needs to address timing differences. What would be considered an example of a timing difference between the two firms? The firms have different fiscal years A companys year end balance sheet for 2013: AR: 900 Inventory: 1200 Fixed assets: 1000 AP: 1300 Sales: 4000 Salaries: 275 What is their fixed asset turnover ratio? 4.0 A firm has a ROE of 0.27 and the industry average ROE is 0.24 Which conclusion would an analyst draw when comparing the firm to the industry? The firm is generating higher returns to owners than the industry What is an example of an inventory method for accounting purposes? Last in, first out method A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually). How much will the teacher have in principal and interest at the end of the 5 years? $121,665 An accountant is 40 years old with an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement. How much will the accountant have upon retirement, if the accountant is able to earn 4% annually on his investment? $336,510 An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end of the tenth year. What is the investor's future balance after 10 years? $24,973 What is the par value (face value) of a bond? The sum of money that the corporation promises to pay upon expiration of the bond A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead the broker to purchase shares in this company? Intrinsic value is 25% below the current stock price A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex dividend date is not a consideration, the broker will receive the full $2.25), and the broker expects a 12% rate of return. What is the highest price the broker should be willing to pay for stock? $34.15 A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year? 14.9% The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of the bond? $1000 Which statement is true about fluctuations in bond prices? When market interest rates fluctuate, the bond coupon rate is unchanged A company issues bonds at a market price of $925. The face value is $1000. The bond matures in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on the company's bonds? 7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? Municipal bonds A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090. What is the yield to maturity for this bond? 4.28% Why does a long-term bond resemble an interest-only loan? None of the principle is repaid until the bond matures Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)? Anytime the number of compounding periods is greater than annual What is the difference between a common stock and preferred stock? Skipping a declared preferred stock dividend results in dividends in arrears Which happens to the risk level in a portfolio as the number of assets in the portfolio increases? Risk decreases at a slower rate What are two primary benefits of the capital asset pricing model (CAPM)? CAPM provides a way to determine the expected return for stocks. CAPM provides a way to estimate the required returned. A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What will the company's weighted average pre-tax cost of capital be? 9.7% Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available? Increase sales prices Alter capacity A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company's marginal tax rate is 34%. What is the tax implication on the sale of the new machine at year 5? Tax liabilities of $17,000 What is the acceptance criteria when using internal rate of return to evaluate a project? Accept when the project return is greater than the required return A company would like to invest in a capital budget project what will be worth $500,000 in 40 years. How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return? $23, 015 A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long-term debt of $150 million. The cost of equity is 12%, the cost of long -term debt is 8%, and the cost of short-term debt is 6%. The marginal tax rate is 35%. What is the weighted average per-tax cost of capital (WACC) for this company? 8.37% What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? CAPM considers risk of a stock relative to the market to determine expected returns Why do companies strive for a lower cost of capital? Less money dedicated to financing means more money is available for production and operations A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and the PP&E will be 55% of the projected sales. Accounts payable are estimated to be 12% of projected sales. Owner's equity is $34 million. Long-term debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed? $8 million [Show Less]
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WGU C214 Chapter 4 – Bigfoot QUESTION AND ANSWER ALREADY SOLVED 2023
What are the most common ratios split into four catagories? 1)liquidity 2) asset use efficiency 3) financing 4)profitability The ratios used in ... [Show More] financial analysis are defined by GAAP. FALSE-There are no rules for ratios. You can make your own to meet your needs. Which of the following statements is NOT correct with respect to using ratios to analyze a firm or firms? A change in a ratios reveals the economic character of the firm.-Using ratios to assess cost structure and creating new ratios to assess cost structure are examples of "Focus" and "flexibility" in ratio analysis. Using ratios to assess three companies is an example of "standardization". The incorrect statement is that ratios (and even change in ratios) reveal economic character. Ratios do NOT answer questions; rather, they indicate where the analyst should dig deeper to understand differences or changes Which one of the following is NOT part of the common ratio categories? Operating Ratios help identify the areas of a firm that need investigation. TRUE-Ratios tell you what questions to ask about the company. What is a liquitity ratio? Firms ability to meet short term obligations Ratios you need to know: Liquidity Current ratio = current assets / current liabilities Quick ratio = (current assets - inventory) / current liabilities AR turnover = credit sales / AR Average collection period = 365 / AR turnover Inventory turnover = COGS / inventory Days on hand = 365 / inventory turnover Accounts receivable turnover for the industry is 4.50. Assume a 365 day year and all sales were made on credit. This tells you that: In this industry, the companies take about 81.1 days to collect their accounts receivable.-Average collection period for the industry is 81.1 days (365/4.5 = 81.1), accounts receivable turnover for Eastern Family is 3.33 (10000/3000 = 3.33), and average collection period for Eastern Family is 109.6 days (365/3.33 = 109.6). Based on these calculations we find that the industry has higher accounts receivable turnover so the industry's AR are more liquid than Eastern Family's and the industry collects accounts receivable more quickly than Eastern Family. Lastly, accounts receivable turnover tells how many times a year a company turns accounts receivable over NOT how many days it takes to collect. (The average collection period tells us on average how many days it takes to collect a firm's receivables) If the current ratio of a company is higher than the industry, then: You cannot tell without looking at other liquidity ratios.-You cannot tell a company's liquidity compared to the industry by just looking at one ratio. Suppose the inventory turnover of a company is higher than the industry. Based on this one ratio, which of the following is most likely to be correct? The firm has too little inventory resulting in lost sales or stock-out-While we can't say for sure the firm has too little inventory (lost sales/stock-outs) based on a single ratio, all the other choices would run counter to the "most likely" interpretation requested by the question. A high inventory turnover implies a relatively smaller inventory; the other available answers imply the firm has larger inventory. "Ratios You Need to Know: Efficiency Total Asset turnover = sales / total assets Fixed Asset turnover = sales / fixed assets OIROI = operating income / total assets What is the fixed asset turnover of Eastern Family?" 1.53-FAT = Sales / Fixed Assets = 10000 / 6500 = 1.53 If a competitor of Eastern Family has a Total Asset Turnover (TAT) of 1.10, then: Eastern Family's asset utilization success cannot be assessed by the TAT alone.-Looking only at TAT for Eastern and a competitor will not allow us to judge whether Eastern is doing good or bad. We have to consider issues such as technology investment and cost structure. Consider two companies, Hoogle and Mapple. They are economically identical. However, for reporting purposes Hoogle uses the managerial discretion that is required with accrual accounting to increase net income relative to Mapple (assume any balance sheet effects are inconsequential). Which of the following is correct: Hoogle's OIROI is higher than Mapple's but Hoogle is NOT more efficient.-Using the accrual accounting system to increase net income is known as earnings management. Since the firms are economically identical, Hoogle's use of accruals to increase net income and OIROI is just a ruse. Suppose that Macrosoft decides to increase the estimated life over which fixed assets are depreciated. Which of the following is most likely? Macrosoft's OIROI will increase.-Macrosoft's depreciation expense will be lower as a result of extending the estimated life of its assets (recall depreciation expense = (cost-salvage value)/estimated life). Lower depreciation expense leads to higher EBIT. Higher EBIT results in higher OIROI. (Note: the change in depreciation expense will increase EBIT and increase total assets; however, the change in EBIT will likely dominate). What is the Times Interest Earned for Eastern Family? 2.41x-TIE = 1350 / 560 = 2.41x If the industry average debt ratio is 60%, then: Eastern Family is more aggressively financed by debt than the industry.-Eastern Family's debt ratio is 67.28% (= total liabilities/total assets = 10,900 / 16200; remember, total liabilities equals current liabilities [$3,900] + long-term liabilities [$7,000]). Since the industry average is only 60%, Eastern Family finances a higher portion of its assets with debt than the industry norm. Thus, Eastern is more aggressivelyfinanced than the industry. Having a higher debt ratio does not necessarily mean that the company's debt is lower quality. Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets are financed by equity? 0.4 The correct answer is 40%. We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So Financial leverage ratio = 2.5 = 100% / Y% = Assets/Equity; thus Y = 100 / 2.5 = 40% If a firm's financial leverage ratio is 2.50, what percentage of assets are financed by debt? 0.6-We know that Assets (100%) = Liabilities (X%) + Equity (Y%). So, Financial leverage ratio = 2.5 = 100%/Y% = Assets/Equity; thus Y = 40%, so X = 60% = percent financed by debt. Ratios You Need to Know: Financing Debt ratio = total liabilities/total assets Interest-bearing debt to total capital (IBDTC) = interest-bearing debt/total capital Times interest earned (TIE) = EBIT / Interest expense Financial leverage ratio (FLR) = total assets/equity Ratios You Need to Know: Profitability Investment Based: ROA = NI / assets ROE = NI / equity Sales Based: Gross margin = (sales - COGS) / sales Operating margin = EBIT / sales Net margin = NI / sales Two categories of Profitability Ratios those based on salesand those based on investment (i.e.,assets or equity)- Assume that the industry average ROE is 12%. For Eastern Family, which of the following best describes their ROE: Eastern Family is generating lower return to owners than the industry.-ROE for Eastern Family is 8.94% (474/5300 = 8.9%) which is less than the industry average. If the industry average ROE is 4.12% and ROA is 2.09%, the most plausible conclusion about Macrosoft's profitability is: Macrosoft is more profitable than the industry.-For Macrosoft: ROE = NI/Equity = 462/8300 = 5.56%; ROA = 462/20900 = .0221 = 2.21%. Hence, Macrosoft is generating higher ROA and ROE than the industry. Which one of the following is NOT included in the DuPont calculation? Net Profit Margin Kyoto Restaurant has total asset turnover of 1.50, ROE of 18.00%, and net profit margin of 6.00%. What is Kyoto's financial leverage ratio? 2-ROE = Net Margin x TAT x FLR, so FLR = ROE / (Net Margin x TAT) = 0.18 / (0.06 x 1.50) = 2.00. What is the range of trend analisis Look back 5 years and forward 3 Which one of the following is NOT an example of the use of meaningful comparison standards for ratio analysis? Reporting ratios in annual financial statements.-There are no required ratios for financial reporting. Simply including ratios for the year in an annual report does not provide a comparison or standard for the calculated ratios. The other answers are examples of internal goal monitoring, trend analysis, and cross-sectional analysis. The timing of a firm's fiscal year end would be most relevant to which of the following firms: ----> A snowboard shop. A hospital. A supermarket. A restaurant.-When analyzing seasonal firms, an analyst must be careful to understand the relationship between fiscal year end and the sales cycle. Which of the following best describes the problem associated with GAAP accounting standards when performing ratio analysis? GAAP accounting standards allow for significant managerial discretion in reported financial statements. Within the confines of GAAP, managers still have significant discretion over reported results. What is the an example of ''recasting'' the financial statements? To evaluate Cisco,we begin by "scrubbing the data." This means that we have to makesure Cisco's financial statements arecomparable to the peer group [Show Less]
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WGU C214 QUESTION WITH COMPLETE SOLUTION 2023
Corporate Finance focuses on financial decision making by a firms management Investments various types of financial instruments (stocks, bonds, et... [Show More] c) Banking or Financial Institutions make money by paying depositors a smaller interest rate than the interest rate charged to borrowers Treasury Securities generally bonds that are issued by the US government Corporate Bonds firms borrowing from the public Stocks a share of ownership in a company Primary financial markets markets where securities are first issued Syndicate a group that is temporarily formed to handle a bond or stock issue: generally large investment bank or institutional investors Underwriter responsible for determining the value of the security; may purchase all the securities & then resale to investors Competitive sale underwriters submit bids offering highest price/lowest interest rate; underwriter resales a slightly higher price Negotiated sale underwriters submit bids, go thru interview to be selected Secondary financial markets where securities are traded after the initial offering (stock market) Auction market has a physical location & prices are determined by the highest price an investor is willing to pay (New York Stock Exchange) Dealer market no physical location- securities are bought & sold thru a network of dealers that trade for themselves; multi dealers per stock (NASDAQ) Role of financial markets they reduce the cost of borrowing from the public or selling ownership to the public Role of Specialist (NYSE) or Dealers provide liquidity for a fair & orderly market; may increase the spread to do so (charge a lower price to seller and a higher price to buyer) Financial market liquidity the ease of trading in the market (high frquency traders) Market orders time sensitive; sales at current bid price/buys at current asking price when order is placed-immediately Limited orders price sensitive; sell occurs when price of stock matches order price Role of price convet information to consumers; affect incentives &affect the distribution of income Dollar Returns Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash flow-coupons for bonds/dividians for stocks) Percentage Returns Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2) (figure for dollar return and divide into bought price) Goal of company/firm to maximize shareholder value or maximize profit Agency costs costs that are incurred when management doesn't act in the best interests of shareholders Profit maximizarion the potential effect of focusing soley on profits Accounting is backward-looking and risk free Finance is forward-looking and involes massive uncertainty Income Statement show results of operation over time; revenues - expenses = net income Balance Sheet a "snap shot" of a firm's assests & financing at a paticular point in time; Assets= Liabilities + Owner's Equity Statement of Cash Flows tracks all cash in and out of the firm Cash Accounting cash in =revenue; cash out=expense Accrual Accounting revenues are recognized when the earnings process is complete; expenses are "matched" to recongized revenues Cash-based income an informal metric based on cash in & cash out of the firm Income for tax purposes based on the government's definition of income, this is the amount of income the government will tax Accounting income the income calculated using accrual accounting (aka, GAAP); best & most complicated metric for understanding the operations of the firm On the Income statement Revenues- Cost of goods sold= Gross profit - Operating expenses= earning before interest & taxes - interest expenses, - taxes= Net income Revenue recognized when "earned" Cost of Goods Sold direct costs of materials & labor Gross profit revenue - cost of goods sold Operating Expenses expenses not directly associated with production (office expenses, administrative expenses, depreciation, research & development) EBIT Earnings before interest & tax; Gross profit - operating expenses (also known as operating income) Net Income on balance sheet EBIT - interest - taxes Current Assets cash marketable securities, A/R, inventory Fixed Assests gross fixed assets- accumulated depreciation Current Liabilities A/P, accruals, notes payable Equity Commonstock, paid-in capital, retained earnings Accumulated depreciation total of all depreciation claimed against the firms fixed assets Net PP&E original cost (Gross PP&E) - accumulated depreciation Net Income (linking balance sheet & income statement) income statement) dividends + change in retained earnings New Retained earnings 0d retained earnings + change in retained earnings or old retained earnings + net income - dividends Gross PP&E orginal cost of property, plant & equipment Statement of Cash Flows cash flow reveals the true health of a company; explains cash in & cash out from operations, investing & financing CFO + CFI + CFF = change in cash - beginning cash = end cash Operational decisions on what/how/whom to sell & buy from Investing decisions on purchasing & selling of long term assets Financing decision on debt & equity, repayment of debts, repurchasing stock & payment of dividends Core activities firm's core activities will impact the way cash flows are catagorized Cash flow management some managers will "manage" (increase/decrease) reporting of cash flows Market pressure pressures to manipulate cash flow categorization in the market place Differences in CFO & Net Income 1. revenue is not the same as cash 2. gains/losses are only seen in net income 3. depreciation is only seen in net income Calculating CFO from balance sheet Net income + non-cash expenses (depreciation) + decrease in operating asset accounts (other than cash) - increase in operating asset accounts (other than cash) + increase in operating liability accounts (other than notes payable) - decrease in operating liability accounts (other than notes payable Increase in assets (A/R, inventory) out flow of cash Increase in liabilities (A/P, accrued wage) increases cash Calculating CFI Change in Gross PP&E or change in Net PP&E + depreciation Dividends (Old RE + NI)- New RE Change in RE Net income - dividends Calculating CFF change in equity + change in debt - new RE Free Cash Flow (FCF) distributable cash Free Cash Flow Firm (FCFF) Net Operating Profit after taxes (NOPAT) + depreciation - capital expenditures on PP&E (CFI) - increases in Net working capital (current assets- current liability) Free Cash Flow Equity holders (FCFE) Net income + depreciation - capital expenditures on PP&E (CFI) - increases in Net working capital (current assets- current liability) + increase in debt (new borrowings-repayment of old debt) Standardization to gain insight when comparing companies & finance Flexibility ratio analysis is not governed by GAAP; best analysts achieve the greatest benefits Focus ratios allow for quick discover of area that need investigation Liquidity ability to meet short-tem obligations Current Ratio (liquidity) Current assets/current liabilities higher ratio= likelyhood of ability to meet short term obligations Quick Ratio (liquidity) Current assets - inventory/current liabilities higher ratio= greater ability to meet short term obligations [Show Less]
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WGU - C214 Financial Management – Final QUESTION AND ANSWER RATED A+
Statement of Cash Flows Shows the change in cash balance for a period of time. Focuses only on items where cash is received, or cash is paid. Cash ... [Show More] Flow from Operating Activities (CFO) Cash flow that a company generates as a result of day-to-day business operations. Deals with Current Assets and Current Liabilities. Cash Flow from Investing Activities (CFI) Cash flow that is generated from investments in long term assets. Cash Flow from Financing Activities (CFF) Cash flow that is used to fund the company. Cash flow that is generated from financing the business. Includes Debt & Equity. How does an increase in Accounts receivable impact CFO? An Increase in Accounts receivable will decrease CFO How does an increase in Accounts payable impact CFO? An Increase in Accounts Payable will increase CFO What financial statement is prepared at a point in time Balance Sheet What financial statements are prepared for a period of time? · Income Statement · Retained Earnings Statement · Statement of Cash Flows Define Efficient Frontier Maximizes expected return for a given level of risk Where would a risk averse investor fall on the efficient frontier? 100% Bonds Where would a risk-taking investor fall on the efficient frontier? 100% Stocks What is a Beta? A Measure of Risk - A Beta 1 is the average risk of all stocks. Anytime a beta is below 1, it is less risk. If it is more than 1, it is high risk. Define efficient market hypothesis as it relates to a firm? For any company to survive, they need to make profitable decisions. Otherwise, investors will shun their business. The firm needs to invest where the return is more than the cost. What is the intrinsic value of a stock under efficient market hypothesis? The intrinsic value of stock is the present value of the stock's after tax net cash flows. Whenever the question states that dividend was paid recently or was just paid, what must be calculated first? Expected Dividend For every Bond question, what must be entered? FV must be entered as 1000 PMT must be entered as 1000 x Coupon Rate What is Capital Budgeting? Refers to long term investment decision making. Refers to the process used in making investment decisions involving projects that generate cash flows over a multi-year horizon. What information is needed for capital budgeting? Initial Outlay (How much money the company is going to invest in the company right now) Differential Annual Cash Flows (Cash flow that the project will generate year after year) Terminal Cash Flow (Cash flow generated at the end of the project) Define NPV? Net Present Value method is the method that is universally used by companies to evaluate long term investment decisions. NPV is defined as the present value of after-tax net tax flows and is most common used method in capital budgeting. The Net Present value should be positive in order for a company to proceed with an investment. If it is negative, the company should not proceed. Define IRR? Another method used for long term investment decisions is the internal rate of return (IRR) method. This method is considered inferior to NPV. Internal Rate of Return (IRR) is defined as the discount rate that results in a Zero Net Present Value. Define Free Cash Flow Cash flows from operating activities minus cash necessary for reinvestment in PPE. Free cash flows represent Cash available for distribution after funding required reinvestment What ratio is used to value a firm using the comparables method? P/E Ratio or Price/Earnings Ratio Define WACC Weighted Average Cost of Capital. The WACC is the weighted average of the various costs of equity and costs of debt. How does a rating downgrade/upgrade impact the cost of capital? A positive credit rating lowers the cost of capital and a negative credit rating increases the cost of capital. Define DFN Discretionary Financing Needed. The difference between total assets and total liabilities and owner's equity is referred to as discretionary financing needed. In other words, this is the amount of discretionary financing that the firm thinks it will need to raise in the next year. What is the risk posed by excessive debt? Excessive debt can lead to a company not able to meet its financial obligations to pay back liabilities or result in potential bankruptcy. What is the relationship between increases or decreases in sales revenue and increases or decreases in EBIT? There is a direct relationship between sales revenue and EBIT. Any change in sales will magnify EBIT in either direction. If there is an increase in sales revenue EBIT will go up. If there is a decrease in sales revenue, EBIT will go down. How do firms manage working capital? Try to collect funds as quickly from customers as possible and pay bills as slowly as possible. What ratios are used to determine effective working capital management? - Current Ratio - Cash Ratio - Receivables Turnover Ratio Name two basic types of financial instruments? Stocks and Bonds What are Primary Markets? Where companies sell securities directly to investors What are Secondary Markets? Where securities are bought and sold from third parties like the New York Stock Exchange Name two types of secondary markets? New York Stock Exchange (NYSE) and the NASDAQ Define or describe an income statement? Reports the company's revenues and expenses during a particular period of time. Also reports net income or net loss. Always prepared first. Define Free Cash Flow Represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets Give two examples of accounting estimates used in financial accounting? Depreciation and Salvage Value Give an example of an accounting difference? Companies using different accounting methods / such as Inventory. What securities issued by the federal government is taxable? Treasury Bonds What is a secured loan? Means that some type of asset is being used as collateral to back the loan. What is an unsecured loan? loan is one that is not backed by a specific asset. An example of an unsecured loan is the line of credit offered by credit card companies. At what price will a bond sell if the required rate of return is equal to the coupon rate? The price will be equal to its par value. At a par price, the yield will equal the coupon rate. What is the difference in paying dividend on a common stock and preferred stock? Preferred stock has priority over common stock in the payment of dividends What financial ratio is used in the comparables method? P/E Ratio or Price/Earnings Ratio How does an increase in market interest rate impact the cost of debt? The cost of debt will decrease What are the three costs associated with inventory? - Product Costs - Storage Costs - Opportunity Costs What financial ratios are used to determine efficient working capital management? - Current Ratio - Cash Ratio - Receivables Turnover Ratio What does the Volcker rule do in the Dodd-Frank act? This rule limits the amount of money can invest in Hedge Funds by banks. What can a firm do as a result of Regulation S and Rule 144A? These are both considered safe harbor permissions where a company does not have to get the permission of the SEC. What should a company include in its prospectus under the securities act of 1933? The prospectus should include the following information: · A description of the company's properties and business · A description of the security being offered · Information about executive management · Financial statements that have been certified by independent accountants How is the expected return from the CAPM model used in financial decisions? Allows to determine the expected return on stocks and incorporate risks Define or describe current ratio? The Current Ratio is a measure of short-term liquidity to pay short term obligations [Show Less]
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WGU C214 Concepts Only Multi Choice Version QUESTION AND ANSWER 2023
Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) False Stocks and bonds are two types of financial instruments (T/... [Show More] F) True The matching principle in accrual accounting requires that: Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. A basic equation for the balance sheet is: Equity = Assets - Liabilities Why is the Balance Sheet known as a permanent statement? Because the other statements are reset at the end of the fiscal year How do you calculate the change in Retained Earnings? Net Income - Dividends Which of the following is generally true? Operating Income and EBIT are the same Which components are part of total assets? Cash Accounts Receivable, Inventory, Long Term Assets Which components are part of current assets? Inventory, Cash, Accounts Receivable, Short Term Investments Which components are part of Total Liabilities? Bonds, Accounts Payable, Mortgage When Fixed Assets increase what happens to Cash? Cash decreases Which is the purpose of the statement of cash flows? explains the change in cash balance for one period of time The OIROI (Operating Income Return on Investment) uses what elements on the income statement? EBIT, Total Assets Why would a company be interested in the TAT-Total Asset Turnover-ratio? a How efficient assets are at producing sales Which of the following gives the largest effective rate (APY) 18.6% compounded daily What does the beta coefficient represent? It is a statistically-derived measure of volatility Why is depreciation expense taken out of the net income calculation, yet added back at the end? Because depreciation expense is tax deductible Why is the NPV preferred over the IRR? Pick Two 1-It measures the dollar value 2- It is harder to calculate What does the Degree of Financial Leverage indicate? The reliance on debt If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? Higher profits to shareholders What is the cash cycle? The amount of time to regenerate cash Why is float important to understand? To time cash expenditures What should a company do to manage its working capital? Collect quickly and pay slowly What would be a source of information to determine Replacement Cost? Building Appraisal What does the Sarbanes-Oxley Act require companies to do? Have internal control audits FINRA (Financial Industry Regulatory Authority) does the following: (pick one) Prosecutes naughty stock brokers If a product is made 100% domestically, what can affect its domestic market? International competition If a company makes its product in a foreign country where labor costs are much lower, what happens? Profits go up and domestic employment decreases. If the value of a dollar increases, the price of imports: Decreases Why would a farmer buy a hedge when he signs a contract to sell produce overseas? To reduce currency risk A basic equation for the balance sheet is: Equity = Assets - Liabilities Why is the Balance Sheet known as a permanent statement? Because the other statements are reset at the end of the fiscal year How do you calculate the change in Retained Earnings? Net Income - Dividends Which of the following is generally true? Operating Income and EBIT are the same Which components are part of total assets? Cash Accounts Receivable, Inventory, Long Term Assets Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments Inventory, Cash, Accounts Receivable, Short Term Investments Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? The firm has too little inventory resulting in lost sales or stock-outs. If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? higher If an investor knows the idiosyncratic risk, the investor knows the: Beta Coefficient Why would we reject a project based on the NPV? the NPV is a negative number Why would we reject a project based on the IRR? the discount rate is higher than the IRR Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? company B invest in more working current assets Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the credit policies of each company? company A can attract more customers Which of the following characterizes collection float increased float indicates slower processing time Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? company B might have higher inventory turnover In regards to Accounts Payable balances, which of the following is true: paying off Accounts Payable on the last day due is good policy If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? the value of company Z id higher Dodd-Frank regulates which segment of the U.S. Economy? banking industry The SEC Securities & Exchange Commission requires companies to do the following: (pick two) 1-register all public offering 2-regulates stock sales false. Economics is a subfield of Finance (T/F) False Capital is defined as a financial asset. (T/F) True Stocks and bonds are two types of financial instruments (T/F) True Primary financial markets are markets where issuers place new securities with investors. (T/F) True An IPO occurs on the primary market (T/F) True false. An IPO is a seasoned equity offering (T/F) False Syndicates are generally made up of investment banks and other institutional investors (T/F) True false. While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. (T/F) False faslse. NASDAQ is the world's largest secondary financial market. (T/F) False [Show Less]
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WGU C214 Pre-Assement QUESTION AND ANSWER RATED A+
WGU C214 Pre-Assement QUESTION AND ANSWER RATED A+
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WGU C214 Financial Mgnmt Pass the OA QUESTION WITH COMPLETE SOLUTION
Characteristics of preferred stock includes -dividends in arrears -dividends are cumulative -higher payoff claim in a BK (has first dibs in a BK) -cons... [Show More] idered "hybrid" (part stock/part bond) -no fixed maturity date -no voting rights -can skip dividend payments -dividends don't change year-after-year -used in start ups (IPO) Preferred stock dividends can go without payment and pay in arrears the following year Characteristics of common stock are -voting rights -no maturity date -corporate governance -lower payoff claim in BK -variable returns -unlimited earnings potential -earnings are in dividends & the increase in price of stock New start up ventures often issue preferred stock (in an IPO) What stock is considered a hybrid preferred stock One thing common stock and preferred stock have in common is both have no maturity date Which type of security has voting rights common stock Debt covenants and restrictions help to ensure that management is meeting bond and shareholder expectations NOTE: covenants are promises meant to be kept What is true regarding bonds -when bond matures, bondholder gets lump sum back -coupon rate doesn't change -maturity is in years -PAR value is typically $1000 -Future value (same as PAR) is typically $1000 Bond sells at face value when required rate of return is equal to the coupon rate Why are bonds the primary method for raising capital because bonds remove the intermediary costs NOTE: IPO's require an intermediary known as a syndicate - a group of banks underwriting the security issue What type of bond can be traded for stock convertible bonds What is the interest rate for annual payments of a bond known as the coupon rate NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged Coupon rate is the established rate of the bond and should never change Debentures are secured bonds NOTE: debentures are a debt instrument (bond) issued to raise cash, secured against a company's assets and backed by credit, transferable by the holder, and may also be unsecured Secured loan has collateral like a mortgage The amount repaid at the expiration date of a bond is PAR value NOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000 Duration measures the market risk of a bond and is the percentage drop in price caused by a 1% increase in yield (rate) NOTE: measurement of the drop in price after a rate increase Maturity of bonds is calculated in years A bond premium occurs when bonds are issued for an amount greater than their face or maturity amount; caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds Junk Bonds are high yield bonds without any stability "Leveraged" results in having more debt (bonds) than equity (stock) and lower stock prices NOTE: recall that debt is safer and levels out risk in a portfolio In current assets, inventory is the LEAST liquid of current assets NOTE: current assets take less than 12 months to make liquid Net fixed assets are long term assets such as buildings, land, equipment, machinery NOTE: assets that are not current A/P represents money paid to suppliers for what is bought on credit and amount owed by a business to suppliers by agreement NOTE: A/P is supplies, inventory, or PP&E Notes payable involves an explicit interest bearing arrangement with the lender at interest cost NOTE: notes payable is a long-term liability Current liabilities are listed in order of maturity NOTE: current liabilities are to be paid within 12 months Two things you can do with net income pay out as dividends or retain (plow back into the firm) On the Statement of Cash Flows, CFO's include -cash receipts from customers (inflow) -cash paid for inventory (outflow) -cash paid for wages (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which is NOT considered an operating expense interest expense is NOT considered an operating expense On the Statement of Cash Flows, CFI includes cash receipts from sale of property and equipment (inflow), cash paid for purchase of equipment (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which of the following is true with respect to CFO an increase in inventory indicates a reduction in CFO NOTE: there is a cost (reduction) to purchasing (increasing) inventory The Statement of Cash Flows is not useful when addressing the financial health of a firm due to the impact of accrual accounting FALSE - the impact of accrual accounting is seen as MOST useful in relation to net income Which is true with respect to CFF an increase in notes payable indicates an increase in CFF Which is not a part of the Statement of Cash Flows cash flows from liquidating activities NOTE: cash flows are operating, investing, and financing The sum of CFO + CFI + CFF is equal to the change in cash during the period Depreciation expense is a significant source of difference between net income and CFO because depreciation is a non-cash expense on the Income Statement associated with the acquisition of long-term assets Subordinated bonds are bonds not backed by collateral For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet TRUE NOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet Increases in operating assets and decreases in operating liabilities will decrease CFO NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO) Unsecured loan has no collateral NOTE: a credit card is an example Assuming no asset disposals, CFI is the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense Assuming no asset disposals, depreciation expense is equal to the change in ACCUMULATED depreciation Assets are financed by other people's money or equity Dividends are considered CFF (financing section) A firm with positive CFO should be considered healthy FALSE NOTE: a positive CFO can still be detrimental to the firm depending on other factors The increase in yield (rate) causes the bond prices to decrease (and vice-versa) NOTE: when interest rates increase, bond prices decrease A working capital increase caused by an increase in inventory will be a cash outflow NOTE: capital increase is inventory purchased so money goes out A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets FALSE NOTE: a firm can NOT sustain negative CFO forever [Show Less]
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WGU C214 Pre-Assement QUESTION AND ANSWER 2023
How can a private firm appropriately maximize shareholder value? By making decisions that keep the control of the business with the owners Why are ... [Show More] American regulators focused on international investing in a global marketplace? Because international investing in a global marketplace is the concern of American investors What is one of the two basic types of financial instruments? Bonds If a company outsources the manufacturing of its products to a foreign country, what are the likeliest outcomes? Consumer prices will decrease and Domestic employment will decrease. What is true about the content and structure of a balance sheet? It reports the assets, liabilities, and equity at a point in time. A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period. How will this change in accounts receivable affect the cash flows from the operating activities section? The change will decrease cash flows from operations by $5,000. Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes? Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes. Selected Data for 20x2 for ABD Inc. Netincome $ 1,000 Depreciation expense $ 300 Change in operating assets $ 600 Change in net property, plant, and equipment$ 5,000 Changes in long-term liabilities $ 1,000 Dividends paid $ 200 What is the firm's cash flow from investments, using the data above and assuming no asset disposals? $5,300 outflow What is the basic equation for a balance sheet? Assets = Liabilities + Equity What do cash flows from investing activities generally relate to? A firm's purchase and sale of long-term assets Which transaction is reflected in cash flow from operating activities? Cash sales to customers What does free cash flow represent? Cash available for distribution after funding required reinvestment An analyst is comparing the ratios of two firms and needs to address timing differences. What would be considered an example of a timing difference between the two firms? The firms have different fiscal years. A company's year-end balance sheetfor 2013 shows the following: Accounts receivable: $900 Inventory: $1200 Fixed assets: $1000 Accounts payable: $1300 Sales: $4000 Salaries expense: $275 What is their fixed asset turnover ratio? 4.0 A firm has a ROE (return on equity) of 0.27 and the industry average ROE is 0.24. Which conclusion would an analyst draw when comparing the firm to the industry? The firm is generating higher returns to owners than the industry. What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules? The product must have been delivered. A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually). How much will the teacher have in principal and interest at the end of the 5 years? $121,665 An accountantis 40 years old with an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement. $336,510 An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end ofthe tenth year. What is the investor's future balance after 10 years? $24,973 What is the par value (face value) of a bond? The sum of money that the corporation promises to pay upon expiration of the bond. A broker is considering purchasing common stock in a company that has average but consistent operating performance. Which factor should lead the broker to purchase shares in this company? The current price of the stock is 25% below its intrinsic value. A broker is considering buying a dividend-paying stock. The dividend will be paid atthe end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex dividend date is not a consideration,the broker will receive the full $2.25), and the broker expects a 12% rate of return What is the highest price the broker should be willing to pay for the stock? $34.15 A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year? 14.9% Which investment option is less desirable for a prudent investor? Quadrant 4, bottom left, 3/4 to right side. Also E. for answer. The market rate of return is 9%. The face value ofthe bond is $1000,the coupon rate is 9% with annual compounding, and the bond matures in 10 years. What is the value of the bond? $1,000 Which statement is true about fluctuations in bond prices? When the market interest rates fluctuate, the required rate of return equals the bond coupon rate. A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years, and the coupon rate is 6% compounded semiannually. What is the yield to maturity (YTM) on the company's bonds? 7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? Municipal bonds A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090. What is the yield to maturity for this bond? 4.28% A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)? Lower than the coupon rate Why does a long-term bond resemble an interest-only loan? None of the principle is repaid until the bond matures. Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)? Any time the number of compounding periods is greater than annual. What is the difference between a common stock and a preferred stock? Skipping a declared preferred stock dividend results in dividends in arrears. Which happens to the risk level in a portfolio as the number of assets in the portfolio increases? Risk decreases at a slower rate. Where along this line will a highly risk-averse investor likely fall? C1 - Three up vertical on the graph curve and also that would be on the most arched part of the graph. What are two primary benefits of the capital asset pricing model (CAPM)? CAPM provides a way to determine the expected return for stocks. & CAPM provides a way to estimate the required return. A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginaltax rate of 34%. The current market value ofthe company is $150 million, with $75 million common equity, $50 million debt, and $25 million preferred equity. What is the company's weighted average cost of capital? 9.7% Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available? Increase sales prices and Alter capacity Partial financial data for a company is as follows: Assets: $10,000,000 Liabilities: $4,000,000 Equity: $6,000,000 Sales: $25,000,000 Netincome: $5,000,000 Profit margin: 20% Dividends: $500,000 Dividend payout ratio: 10% ROA: 50% ROE: 83% What is the sustainable growth rate for the company? 75% A machine will reach the end of its useful life in Year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company's marginaltax rate is 34%. What is the tax implication on the sale of the new machine at Year 5? Tax liabilities of $17,000 What is the acceptance criteria when using internal rate of return to evaluate a project? Accept when the project return is greater than the required return. A company would like to invest in a capital budget project that will be worth $500,000 in 40 years. How much should the company investtoday, assuming an average inflation rate of 2% and a 10% annual return? $24,393 A company has a market value of $500 million. It has a market value of equity of $200 million, a market value of long-term debt of $150 million, and a market value of short-term debt of $150 million. The cost of equity is 12%,the cost of long-term debtis 8%, and the cost of short-term debtis 6%. The marginal tax rate is 35%. What is the weighted average pre-tax cost of capital (WACC) for this company? 9.00% What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? CAPM considers risk of a stock relative to the market to determine expected return. Why do companies strive for a lower cost of capital? Less money dedicated to financing means more money is available for production and operations. A corporation established its projected sales at $210 million. Itis using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sales, and PP&E will be 55% of projected sales. Accounts payable are estimated to be 12% of projected sales. Owners' equity is $34 million. Long-term debtis $90 million. Additionally,the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed? $8 million Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio. What are the forecasted retained earnings for Year 2011? $2,020,000 How is the amount of discretionary financing that is needed by a firm determined? Projected total assets − projected total liabilities + projected owner's equity null null Which three pieces of data are needed to perform a capital budget analysis? Annual cash flows for the life of the new project., Cash flow when the firm terminates the project., & The initial cost of the new project. What are two examples of sunk costs? The cost of a market study conducted prior to the decision and The cost of feasibility consulting incurred before the decision point. Company A has a degree of operating leverage of 1.85 and Company B has a degree of operating leverage of 6.5. What does the degree of operating leverage say about the two companies? Company A has lower risk than Company B. [Show Less]
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