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WGU C214 Exam Bundle (Graded A)
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WGU C214 Finance Management PVCC Exam Questions and Answers
How can a private firm appropriately maximize shareholder value? - ANSWER-By making decisions that keep the control of the business with the owners Why ... [Show More] are American regulators focused on international investing in a global marketplace? - ANSWER-Because international investing in a global marketplace is the concern of American investors What is one of the two basic types of financial instruments? - ANSWER-Bonds Which two effects does the unbundling and offshoring of production have on employment when the global value chain is taken into consideration? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-Assets=liabilities+equity What do cash flows from investing activities generally relate to? - ANSWER-A firm's purchase and sale of long-term assets Which transaction is reflected in cash flow from operating activities? - ANSWER-Cash sales to customers What does free cash flow represent? - ANSWER-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? - ANSWER-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? - ANSWER-Net Sales / Average Net Fixed Assets Sales @ 4000 / Fixed Assets @ 1000= 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? - ANSWER-The firm is generating higher returns to owners than the industry What is an example of an inventory method for accounting purposes? - ANSWER-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? - ANSWER-N 5, I/Y 4%, PV 100,000, PMT 0, Solve for FV = $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? - ANSWER-N 30 yrs., I/Y 4%, PV 0, PMT 6,000, solve for FV = $336,510 or $336,509.6265 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? - ANSWER-N 10 yrs, I/Y 4%, PV 0, PMT 2,000, solve for FV = $24,012.21 What is the par value (face value) of a bond? - ANSWER-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? - ANSWER-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? - ANSWER-$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? - ANSWER-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? - ANSWER-$1000 Which statement is true about fluctuations in bond prices? - ANSWER-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? - ANSWER-7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? - ANSWER-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? - ANSWER-4.28% Why does a long-term bond resemble an interest-only loan? - ANSWER-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)? - ANSWER-Anytime the number of compounding periods is greater than annual What is the difference between a common stock and preferred stock? - ANSWER-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? - ANSWER-Risk decreases at a slower rate What are two primary benefits of the capital asset pricing model (CAPM)? - ANSWER-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? - ANSWER-9.7% Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available? - ANSWER-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? - ANSWER-Tax liabilities of $17,000 What is the acceptance criteria when using internal rate of return to evaluate a project? - ANSWER-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? - ANSWER-$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? - ANSWER-8.37% What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? - ANSWER-CAPM considers risk of a stock relative to the market to determine expected returns Why do companies strive for a lower cost of capital? - ANSWER-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 [Show Less]
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WGU C214 Final Exam Questions with Verified Answers
Coupon Rate - ANSWER-The interest rate that a company promises to pay on bonds Market Rate - ANSWER-The interest rate on other comparable bonds Par V... [Show More] alue - ANSWER-The amount payable on maturity of the bond Market rate - ANSWER-Same as YTM - Yield to Maturity Gordon Growth Model - ANSWER-Assumes stable growth rates and does not incorporate risk CAPM Model - ANSWER-Allows to determine expected return on stocks and incorporates risk How do public companies maximize shareholder value? - ANSWER-By maximizing Earnings Per Share How do private companies maximize shareholder value? - ANSWER-By keeping control within the company Positive credit rating has what effect on capital? - ANSWER-Lowers cost of capital What is cash flow from operating activities? - ANSWER-It is cash flow generated for sale of products and services What is the formula for retained earnings? - ANSWER-Ending retained earnings=Beginning retained earnings + Net Income = Dividends Is depreciation and salvage value on an asset precise or is it an estimate? - ANSWER-It is an estimate What is an example of accounting difference - ANSWER-Companies using different accounting methods What is an example of a timing difference? - ANSWER-Companies using different fiscal years Do stock holders or bond holders have voting rights? - ANSWER-Stock holders have voting rights What factors are considered for the initial outlay of a new investment? - ANSWER-Purchase price of new equipment, shipping costs, and investment in working capital What is the risk associated with debt financing? - ANSWER-Too much debt can lead to bankruptcy What are inventory related costs? - ANSWER-Product costs, storage costs, and opportunity costs What statements are required to be filed with the SEC - ANSWER-Annual audited financial statements What are the issues with understanding foreign financial statements? - ANSWER-Foreign financial statements use international financial reporting standards and they are different from US accounting standards What does cash flow from investing activities measure? - ANSWER-It measure investments in long term assets such as building, equipment, and machinery What does the efficient frontier measure? - ANSWER-It maximizes expected return for a given level of risk What is the objective of portfolio diversification? - ANSWER-The objective is to reduce risk What is the definition of a current asset and current liability? - ANSWER-A current asset is cash or any other asset that can be converted to cash within 12 months and a current liability is any liability that has to be paid within 12 months What is a differential cash flow? - ANSWER-It is the amount of net cash flow generated a new asset on a yearly basis What does the current ratio measure? - ANSWER-It is a measure of short term liquidity to pay short term obligations How does credit rating impact cost of capital? - ANSWER-A rating downgrade will increase the cost of capital What is one of the roles of the SEC? - ANSWER-It regulates public disclosures of entities that sell debt and equity to the public What leads to an increase in APY? - ANSWER-An increase in the frequency of compounding - like going from annual to monthly compounding What bonds are taxed at the federal level? - ANSWER-Treasury bonds What bonds are not taxed at the federal level? - ANSWER-Municipal bonds What are the two benefits of unblundling and offshoring? - ANSWER-It reduces costs and results in higher sales and employment. It allows for sale of intermediate and final goods at lower prices and increases employment What are the two basic types of financial instruments? - ANSWER-Stocks and bonds What are primary and secondary markets? - ANSWER-Primary markets are where companies directly sell securities to investors and secondary markets are where bought and sold from third parties like the New York Stock Exchange Dodd Frank regulates which segment of the US Economy? - ANSWER-Banking industry What does the Sarbanes Oxley Act require companies to do? - ANSWER-Have internal control audits What would be considered a cash outflow in the investing section of the statement of cash flows? - ANSWER-Purchase of equipment What is Net Present Value? - ANSWER-The present value of after tax net cash flows and is the most commonly used method in Capital Budgeting Internal Rate of Return - ANSWER-Defined as the discount rate that results in a Zero Net Present Value What does inflation do to the value of cash flows? - ANSWER-It lowers the value of cash flows What does Free Cash Flow equal? - ANSWER-Cash flow from Operations - Change in Net working capital - Investment in PPE What does the degree of financial leverage indicate? - ANSWER-The reliance on debt What is degree of operating risk also known as? - ANSWER-Business Risk What should a company do to manage its working capital? - ANSWER-Collect quickly and pay slowly How can a firm speed up collections? - ANSWER-Offer discounts to pay early and electronic check processing What ratio is used to measure short term liquidity? - ANSWER-Current ratio measures short term liquidity for a firm When will ROE be greater than ROA? - ANSWER-The company has debt and uses the interest expense to reduce its taxes Market Rate = Coupon Rate - ANSWER-Bonds will sell at par value Market Rate > Coupon Rate - ANSWER-Bonds will sell at discount Market Rate < Coupon Rate - ANSWER-Bonds will sell at premium Discretionary Financing Needed equals? - ANSWER-Projected Total Assets - Projected Total Liabilities - Projected Equity What gives the largest effective rate (APY)? Monthly., daily, weekly, yearly? - ANSWER-Daily Sustainable growth rate - ANSWER-How quickly a company can expand using only its own sources of funding. SGR [Show Less]
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C214 Financial Management – Final Exam with complete solutions
Statement of Cash Flows - ANSWER-Shows the change in cash balance for a period of time. Focuses only on items where cash is received, or cash is paid. C... [Show More] ash Flow from Operating Activities (CFO) - ANSWER-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) - ANSWER-Cash flow that is generated from investments in long term assets. Cash Flow from Financing Activities (CFF) - ANSWER-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? - ANSWER-An Increase in Accounts receivable will decrease CFO How does an increase in Accounts payable impact CFO? - ANSWER-An Increase in Accounts Payable will increase CFO What financial statement is prepared at a point in time - ANSWER-Balance Sheet What financial statements are prepared for a period of time? - ANSWER-· Income Statement · Retained Earnings Statement · Statement of Cash Flows Define Efficient Frontier - ANSWER-Maximizes expected return for a given level of risk Where would a risk averse investor fall on the efficient frontier? - ANSWER-100% Bonds Where would a risk-taking investor fall on the efficient frontier? - ANSWER-100% Stocks What is a Beta? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-Expected Dividend For every Bond question, what must be entered? - ANSWER-FV must be entered as 1000 PMT must be entered as 1000 x Coupon Rate What is Capital Budgeting? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-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 - ANSWER-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? - ANSWER-P/E Ratio or Price/Earnings Ratio Define WACC - ANSWER-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? - ANSWER-A positive credit rating lowers the cost of capital and a negative credit rating increases the cost of capital. Define DFN - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-- Current Ratio - Cash Ratio - Receivables Turnover Ratio Name two basic types of financial instruments? - ANSWER-Stocks and Bonds What are Primary Markets? - ANSWER-Where companies sell securities directly to investors What are Secondary Markets? - ANSWER-Where securities are bought and sold from third parties like the New York Stock Exchange Name two types of secondary markets? - ANSWER-New York Stock Exchange (NYSE) and the NASDAQ Define or describe an income statement? - ANSWER-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 - ANSWER-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? - ANSWER-Depreciation and Salvage Value Give an example of an accounting difference? - ANSWER-Companies using different accounting methods / such as Inventory. What securities issued by the federal government is taxable? - ANSWER-Treasury Bonds What is a secured loan? - ANSWER-Means that some type of asset is being used as collateral to back the loan. What is an unsecured loan? - ANSWER-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? - ANSWER-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? - ANSWER-Preferred stock has priority over common stock in the payment of dividends What financial ratio is used in the comparables method? - ANSWER-P/E Ratio or Price/Earnings Ratio How does an increase in market interest rate impact the cost of debt? - ANSWER-The cost of debt will decrease What are the three costs associated with inventory? - ANSWER-- Product Costs - Storage Costs - Opportunity Costs What financial ratios are used to determine efficient working capital management? - ANSWER-- Current Ratio - Cash Ratio - Receivables Turnover Ratio What does the Volcker rule do in the Dodd-Frank act? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-Allows to determine the expected return on stocks and incorporate risks Define or describe current ratio? - ANSWER-The Current Ratio is a measure of short-term liquidity to pay short term obligations Define a convertible bond - ANSWER-More than being a type of bonds, convertibility is a feature that may be added to any bond type. Convertibility refers to the ability to convert a bond into equity securities, usually common stock. It gives the investor the right to trade each bond for a set number of shares of common stock whenever the investor chooses What are the requirements of FINRA? - ANSWER-- FINRA Requires customers maintain up to date customer records - You must be a member of FINRA before you can sell investment products to the public What are the requirements of Sarbanes-Oxley Act of 2002? - ANSWER-- Requires companies to have strong internal control systems / audits so that management is less likely to commit fraud. - Requires Management to prepare honest, fair and accurate financial statements Why might accounting income and taxable income be different? - ANSWER-Income statements for SEC follow GAAP, but income for tax purposes follow IRS rules. Actual taxes paid w [Show Less]
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WGU C214 Financial Mgmt Pass the OA Exam (Graded A)
Characteristics of preferred stock includes - ANSWER--dividends in arrears -dividends are cumulative -higher payoff claim in a BK (has first dibs in a BK... [Show More] ) -considered "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 - ANSWER-can go without payment and pay in arrears the following year Characteristics of common stock are - ANSWER--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 - ANSWER-preferred stock (in an IPO) What stock is considered a hybrid - ANSWER-preferred stock One thing common stock and preferred stock have in common is - ANSWER-both have no maturity date Which type of security has voting rights - ANSWER-common stock Debt covenants and restrictions help to ensure that - ANSWER-management is meeting bond and shareholder expectations NOTE: covenants are promises meant to be kept What is true regarding bonds - ANSWER--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 - ANSWER-required rate of return is equal to the coupon rate Why are bonds the primary method for raising capital - ANSWER-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 - ANSWER-convertible bonds What is the interest rate for annual payments of a bond known as - ANSWER-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 - ANSWER-never change Debentures are - ANSWER-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 - ANSWER-has collateral like a mortgage The amount repaid at the expiration date of a bond is - ANSWER-PAR value NOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000 Duration measures - ANSWER-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 - ANSWER-years A bond premium occurs when - ANSWER-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 - ANSWER-high yield bonds without any stability "Leveraged" results in - ANSWER-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 - ANSWER-LEAST liquid of current assets NOTE: current assets take less than 12 months to make liquid Net fixed assets are - ANSWER-long term assets such as buildings, land, equipment, machinery NOTE: assets that are not current A/P represents money paid to - ANSWER-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 - ANSWER-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 - ANSWER-maturity NOTE: current liabilities are to be paid within 12 months Two things you can do with net income - ANSWER-pay out as dividends or retain (plow back into the firm) On the Statement of Cash Flows, CFO's include - ANSWER--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 - ANSWER-interest expense is NOT considered an operating expense On the Statement of Cash Flows, CFI includes - ANSWER-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 - ANSWER-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 - ANSWER-FALSE - the impact of accrual accounting is seen as MOST useful in relation to net income Which is true with respect to CFF - ANSWER-an increase in notes payable indicates an increase in CFF Which is not a part of the Statement of Cash Flows - ANSWER-cash flows from liquidating activities NOTE: cash flows are operating, investing, and financing The sum of CFO + CFI + CFF is equal to - ANSWER-the change in cash during the period Depreciation expense is a significant source of difference between net income and CFO because - ANSWER-depreciation is a non-cash expense on the Income Statement associated with the acquisition of long-term assets Subordinated bonds - ANSWER-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 - ANSWER-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 - ANSWER-decrease CFO NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO) Unsecured loan - ANSWER-has no collateral NOTE: a credit card is an example Assuming no asset disposals, CFI is - ANSWER-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 - ANSWER-the change in ACCUMULATED depreciation Assets are financed by - ANSWER-other people's money or equity Dividends are considered - ANSWER-CFF (financing section) A firm with positive CFO should be considered healthy - ANSWER-FALSE NOTE: a positive CFO can still be detrimental to the firm depending on other factors The increase in yield (rate) causes - ANSWER-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 - ANSWER-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 - ANSWER-FALSE NOTE: a firm can NOT sustain negative CFO forever Which should NOT be included in the calculation of CFF - ANSWER-a change in retained earnings Dividing CFO among the owners of a firm is a sustainable policy - ANSWER-FALSE NOTE: CFO doesn't allow for required reinvestment Dividing CFO among owners of a firm is NOT a sustainable policy - ANSWER-TRUE NOTE: CFO doesn't allow for required reinvestment A firm reports the following cash flow data CFO 1 million, CFI 750K, and CFF -100K. Is the firm sustainable - ANSWER-Yes, the firm is sustainable. CFF may be due to paying down debt, buying back stock, or paying dividends When calculating CFO, an increase in an operating liability such as A/P or accrued wages represents - ANSWER-an inflow to the firm NOTE: if the firm owes to suppliers, more inventory is purchased and on hand (inflow) NOTE: Operating liability accounts are: Increases: an inflow of cash Decreases: an outflow of cash CFO can be dramatically impacted by managerial discretion in the financial reporting process - ANSWER-TRUE NOTE: management has discretion which is why financial statements can be misleading Management of cash flow from operations - ANSWER-is dramatically impacted by managerial decisions The impact of accrual accounting is seen as - ANSWER-MOST useful in relation to net income A change in notes payable (bank loans) will - ANSWER-impact CFF NOTE: A/P and A/R impacts CFO; while notes payable (bank loans) are considered long-term and affect CFF Which will decrease CFO - ANSWER-an increase in A/R & a decrease in A/P NOTE: -when A/R is increased, product has been sold -when A/P is decreased, suppliers have been paid These actions decrease CFO Which represents assets in CFO - ANSWER-A/R and inventory Depreci [Show Less]
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C214 Multiple Attempt Study Guide latest updated
What standards are used to help US investors understand and compare foreign financial statements to domestic financial statements? - ANSWER-International F... [Show More] inancial Reporting Standards When a company is optimizing its resources and maintaining or improving productivity, they are engaging in what hypothesis - ANSWER-Efficient Market Hypothesis What is the basic type of negotiable debt? - ANSWER-Bonds What is the characteristic of a stock sold in the secondary markets? - ANSWER-Stocks sold in the secondary markets are traded after the initial offering. If a company is engaged in lobbying for tariffs and trade restrictions, if they are successful, what are the two principal impacts? - ANSWER-Protection for the lobbyist and higher prices for the consumer pre reduced competition. Describe what an income statement is in one sentence? - ANSWER-It covers a period of time and starts with sales, takes out expenses, and ends with net income. What is the difference between taxable income and accounting income? - ANSWER-Accounting income is reported as net income on the income statement whereas Taxable income is used to determine the amount of tax a firm must pay. Net Income 15,000 Depreciation Exp 2,000 Change in Operating Assets 1,200 Change in PP&E 2,000 Change in long-term liab. 1,200 Dividends paid 1,500 What is the Cash Flow from Financing? - ANSWER-CFF= Incr Stock + Incr Debt -Dividends Paid = 1200-1500 = -300 Net Income 121,000 Depreciation Expense 4,000 Accounts Receivable (30,000) Change in net PP&E 15,000 Accounts Payable (5,000) New Bank Loan 12,000 Dividends Paid 1,500 What is the Cash Flow from Investing? - ANSWER-CFI = Change in Net PPE + Depreciation Expense = 15,000 + 4,000 = 19,000 A grandmother sets up a trust for her grandson. She desires him to receive $20,000 per year. Her investment advisor finds an investment vehicle that will yield 7%. How much will the grandmother have to put into the investment? - ANSWER-20000/.07= 140*12 =1680.00 What is the number of payments of a semi-annual bond if the number of years remaining are 12? - ANSWER-There are 24 semi-annual payments remaining bWhat is the expected rate of return for a stock that has a eta of 2.1. The market rate is 8.5% with a risk free rate of 2%. - ANSWER-E[R]=Rf + B(Rm - Rf) =2% + 2.1(8.5%-2.0%) =.02 + 2.1(0.0850-.02) =.01565 or 15.65% A company has a trial balance that shows $13,000 in bonds payable. On which financial statement should this be shown? - ANSWER-This would be shown on the Balance Sheet under Long Term Liabilities Which is the principal account comprising Cash Flow from Investing - ANSWER-The principal account for CFI is PP& E What is the cash effect on the Statement of Cash Flow when current liabilities decline? - ANSWER-Results in a decrease in cash If two companies use different inventory valuation methods, what difference would that be called in calculating net income? - ANSWER-Accounting Difference There are two competitors. The gross margin for Green Company is .45. The gross margin for Red Company is .40 Which company has a more productive manufacturing process? Why? - ANSWER-Green company has a more productive manufacturing process because the high gross margins are usually associated with and efficient production process. What is the current ratio given a balance sheet with the following account balances: Cash 10,000 Accounts Receivable 252,000 PP&E 725,000 Accounts Payable 93,000 Bank Loan 425,000 Common Stock 1,000,000 - ANSWER-Current Ratio = Current Assets/Current Liabilities =10000 + 252000/93000 =262000/93000 =2.8172 If a nephew anticipates a $250,000 gift from a wealthy uncle in five years, what is the present value of the gift if the discount rate is 6%? - ANSWER-Calculator: FV= 250000 I/R= 6 N= 5 Cpt PV = -186,814.54 Or PV=FV/(1+r)n =250000/(1.07)5 =250000/1.3382 =186,184.54 A stockbroker wishes to retire in 15 years with $3,000,000 in her retirement account. How much will she have to put aside at the end of each year to reach her goal if she can invest her money at 8.5%? - ANSWER-Calculator FV = 3000000 I/R= 8.5 N=15 CPT, PMT= 106,261.38 If there is a bankruptcy and a loan wont be paid off until another debt is satisfied, what is the loan called? - ANSWER-Subordinated Debenture Example: 1st mortgage is primary, Second Mortgage is secondary. Secondary Mortgage is Subordinated Debenture A $1000 bond has a coupon rate of 3.5% and a market rate of 5%. What is the value of the bond if it matures in 5 years? - ANSWER-Calculator: PV=- 1000 PMT = 35 I/R= 5 N= 5 CPT, FV= 1082.88 If a bond has a coupon rate lower that the yield to maturity, what can we say about the bond price? - ANSWER-Bond price at a discount What will the annual interest payment be for a zero coupon bond? - ANSWER-Zero Coupon bonds do not make interest payments Which securities are issued by non-federal government organizations that might not be subject to federal income tax? - ANSWER-Municipal Bonds What is the APY in relationship to the APR if compounding happens more frequently than once a year? - ANSWER-If there is more than one compounding period, the APY will be greater than the APR. If there is only one compounding period per year, the APY and the APR will be the same. A 2% $1000 bond matures in 3 years. If the market interest rate is 2.9 what is the price? - ANSWER-Calculator: N = 3 I/Y = 2.9 FV = 1000 PMT (2% of 1000) CPT PV = 974.49 A company wishes to improve the marketability of their bond and does so by putting in the option for the investor to replace their bond with common stock. What is this kind of bond called? - ANSWER-Convertible Bonds If a company's credit rating is downgraded, what will happen to the price of its bonds? - ANSWER-Bond price will decrease, yield increase What do you call a loan that does not require collateral? - ANSWER-Unsecured Loan A project plan has the following forecast results with a WACC of 11%. What is the net Present Value? Initial Outlay: -70,000 Year 1 13,000 Year 2 15,000 Year 3 18,000 Year 4 20,000 Year 5 25,000 - ANSWER-Press CF, then Input: CF0 -70000, Enter, Down Arrow C01 13000, Enter, Down Arrow C02 15,000, Enter, Down Arrow C03 18,000, Enter, Down Arrow C02 20,000, Enter, Down Arrow C03 25,000, Enter, Down Arrow Press NPV button, enter 11 for I, Enter, Down Arrow NPV = -4,941.60 (Minus sign is significant per would not approve the project) A project has an NPV of 52,000. What does mean as far acceptance? - ANSWER-If the computed NPV is greater than zero, the project is accepted. What is the net present value of expected future case flows for a share of stock called? - ANSWER-Intrinsic Value What is the internal rate of return given the following information about the project: Initial Outlay -50,000 Year 1 20,000 Year 2 22,000 Year 3 18,000 - ANSWER-Calculator: Press CF, then Input: CF0 -50000, Enter, Down Arrow C01 20000, Enter, Down Arrow C02 22,000, Enter, Down Arrow C03 18,000, Enter, Down Arrow Press IRR button, CPT IRR = 9.8699 An investor purchases a share of stock for $82.00. She sells it in on year for $92.00 and receives a dividend of $2.95. What is the rate of return the investor achieved? - ANSWER-Ks = [(P1+D1)/P0] - 1 = [(92+2.95)]/82] - 1 = (94.95/ 82)-1 =1.1579 - 1 =15.79 Found etext: 7.7 Common Stock Valuation: Single Holding Period Model 36. The expected return for a stock is 10% with a forecast growth rate of 2.5%. The company recently paid a dividend of $3.50. What is the highest price an investor should pay for the stock? - ANSWER-V0 = D1/(kcs - g) VO = 3.50(1.025)/(.10-.025) VO = 3.50/ 0.0750 VO = 47 In the event of liquidation who will be paid third? - ANSWER-Secured, Unsecured, Preferred, Common 38. What is the growth in the expected stock price change for a company is trying to value their stock's return in an uncertain economy. (Hint: use the same method for calculating Expected Return for different economic states) They need to use the most likely result for their planning. They estimate a 10% probability that will result in a stock price drop of 7%, a 60% probability for no change in the stock, and a 30% probability for a stock price increase of 15% - ANSWER-E(R) = .10*-.07+.60*0+.30*.15 =.0070+.0450 =.0520 or 5.2% 39. What will be the risk-return profile for an investor with a high tolerance for risk? - ANSWER-A higher rate of return An investor wishes to decrease the risk level of their portfolio. How would they do that, if they want their portfolio to be closer to the market. - ANSWER-Diversification How does a person calculating a long term debt cost in a WACC calculation? - ANSWER-R d,1-t is the cost of long-term debt Find the weighted after tax cost of bonds given the following information: Total Market Value = 500, bond market [Show Less]
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WGU C214 Pre-Assessment Exam Questions with correct Answer
How can a private firm appropriately maximize shareholder value? - ANSWER-By making decisions that keep the control of the business with the owners Why ... [Show More] are American regulators focused on international investing in a global marketplace? - ANSWER-Because international investing in a global marketplace is the concern of American investors What is one of the two basic types of financial instruments? - ANSWER-Bonds If a company outsources the manufacturing of its products to a foreign country, what are the likeliest outcomes? - ANSWER-Consumer prices will decrease and Domestic employment will decrease. What is true about the content and structure of a balance sheet? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-$5,300 outflow What is the basic equation for a balance sheet? - ANSWER-Assets = Liabilities + Equity What do cash flows from investing activities generally relate to? - ANSWER-A firm's purchase and sale of long-term assets Which transaction is reflected in cash flow from operating activities? - ANSWER-Cash sales to customers What does free cash flow represent? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-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? - ANSWER-$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. - ANSWER-$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? - ANSWER-$24,973 What is the par value (face value) of a bond? - ANSWER-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? - ANSWER-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? - ANSWER-$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? - ANSWER-14.9% Which investment option is less desirable for a prudent investor? - ANSWER-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? - ANSWER-$1,000 Which statement is true about fluctuations in bond prices? - ANSWER-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? - ANSWER-7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? - ANSWER-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? - ANSWER-4.28% A bond that matures in 30 months is sold at a premium. What is the yield to maturity (YTM)? - ANSWER-Lower than the coupon rate Why does a long-term bond resemble an interest-only loan? - ANSWER-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)? - ANSWER-Any time the number of compounding periods is greater than annual. What is the difference between a common stock and a preferred stock? - ANSWER-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? - ANSWER-Risk decreases at a slower rate. Where along this line will a highly risk-averse investor likely fall? - ANSWER-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)? - ANSWER-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? - ANSWER-9.7% Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available? - ANSWER-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? - ANSWER-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? - ANSWER-Tax liabilities of $17,000 What is the acceptance criteria when using internal rate of return to evaluate a project? - ANSWER-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? - ANSWER-$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? - ANSWER-9.00% What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model? - ANSWER-CAPM considers risk of a stock relative to the market to determine expected return. Why do companies strive for a lower cost of capital? - ANSWER-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? - ANSWER-$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? - ANSWER-$2,020,000 How is the amount of discretionary financing that is needed by a firm determined? - ANSWER-Projected total assets − projected total liabilities + projected owner's equity null - ANSWER-null Which three pieces of data are needed to perform a capital budget analysis? - ANSWER-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? - ANSWER-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? - ANSWER-Company A has lower risk than Company B. Which action is an important part of managing accounts receivable? - ANSWER-Setting credit terms. What is the main benefit associated with holding inventory? - ANSWER-It makes it possible to meet the demands of customers. A person needs to determine the costto replace a company's property, plant, and equipment using the replacement cost method. Which value does this person need to consider in order to make this determination? - ANSWER-Market value Which type of investment will a risk-averse investor most likely invest in? - ANSWER-Index funds Company Y has a greater degree of financial risk than Company Z. What will happen if there is a 1% decrease in EBIT for both companies? - ANSWER-It will result in a greater percentage decrease in Company Y's pre-tax profit. How does the anticipation of bankruptcy affect a firm's capital structure? - ANSWER-A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs. Why would a company prefer to raise capital by issuing debt instead of issuing new equity? - ANSWER-Debt financing provides interest tax benefits. Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets? - ANSWER-Preferred stock [Show Less]
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Financial Management WGU C214 MBA Exam Questions and Answers
How can a private firm appropriately maximize shareholder value? - ANSWER-By making decisions that keep the control of the business with the owners. Why... [Show More] are American regulators focused on international investing in a global marketplace? - ANSWER-Because american investors are focused on international investing in a global marketplace. What is one of the two basic types of financial instruments? - ANSWER-Bonds. If a company outsources the manufacturing of its products to a foreign country, what are the likeliest outcomes? - ANSWER-Consumer prices will decrease and domestic employment will decrease. What is true about the content and structure of a balance sheet? - ANSWER-It reports the assets, liabilities, and equity at a point in time. A company reported an increase in accounts receivable of $5000 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? - ANSWER-The change will decrease cash flows from operations by $5000 Which statement accurately explains the recognitions of revenues and expenses under accounting income and income for tax purposes? - ANSWER-Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes. What is a firms cash flow from investments, using the data below and assuming no asset disposals? -change in PP&E $5000 -depreciation expense $300 - ANSWER-Putting these two only together. $5300 outflow What is the basic equation for a balance sheet? - ANSWER-Assets=liabilities + equity What do cash flows from investing activities generally relate to? - ANSWER-A firm's purchase and sale of long-term assets. Which transaction is reflected in cash flow from operating activities? - ANSWER-Cash sales to customers. What does free cash flow represent? - ANSWER-Cash available for distribution after funding required reinvestment. I'm comparing the ratios of two firms, looking to address timing differences, what would be considered an example of a timing difference between the two firms? - ANSWER-The firms have different physical years. What is fixed asset turnover rate? Sales / fixed assets. Ex: sales 4000 fixed assets 1000 - ANSWER-The fixed asset turnover rate would be 4.0 A firm has a ROE (return on equity) of .27 and the industry average ROE is .24. What conclusion can an analyst draw? - ANSWER-The firm in 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? - ANSWER-The product must have been delivered. A teacher invest $100,000, for 5 years at an interest rate of 4% compounded annually. How much will they have at the end of 5 years? - ANSWER-Long math. 1 year 104,000. 2 year 108,160 3 year 114,486 4 year 118,985 5 year etc. compound yearly and add to last compound = $121,665 An accountant is 40, retiring at 70 =30 years. Going to save 6,000 per year and will earn 4% annually. - ANSWER-$336,510 An investor deposits $2000 each year for 10 years, 4% interest bearing account, the last cash is received 1 year prior to the end of the 10 years. What is the future balance after 10 years. - ANSWER-$24,973 What is the par value of a bond? - ANSWER-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 an average but consistent operating performance. Which factor should lead the broker to purchase shares in this company? - ANSWER-The current price of the stock is 25% below its intrinsic value. Consider buying a dividend paying stock. Dividend is paid at the end of the year. Consensus is that it will be worth $36 at the end of the year. The company pays a 2.25 annual dividend. The broker expects a 12% rate of return. What is the highest price the broker should be willing to pay for the stock? - ANSWER-$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? - ANSWER-14.9% Figure that represents the levels of market efficiency. Which investment option is less desirable for a prudent investor? - ANSWER-E- the area in which the most risk is shows. 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? - ANSWER-$1000 Which statement is true about fluctuation in bond prices? - ANSWER-When market interest rates fluctuate, the bond coupon rate is unchanged. A company issued bonds at 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 on the company's bonds? - ANSWER-7.06% Which securities are issued by local governments and are usually tax exempt at the federal level? - ANSWER-Municipal bonds. A bond pays $27.50 semiannually. Matures in 9 years and is currently priced at $1090. What is the yield to maturity for this bond? - ANSWER-4.28% A bond that matures in 30 months is sold at a premium. What is the yield to maturity? - ANSWER-Lower than the coupon rate. Why does a long term bond resemble an interest only loan? - ANSWER-None of the principle is repaid until the bond matures. Under which circumstances will annual percentage yield be greater than the annual percentage rate? - ANSWER-Any time the number of compounding periods is greater than the annual. What is the difference between a common stock and a preferred stock? - ANSWER-Skipping a declared preferred stock dividends results in dividends in arrears. What happens to the risk level in a portfolio as the number of assets in the portfolio increases? - ANSWER-Risk decreases at a slower rate. The figure below represents a portfolio that plots the expected return against the risk of each investment. Where will a highly risk adverse investor call? - ANSWER-C1- in the risky zone What are two primary benefits of the capital asset pricing model CAPM? - ANSWER--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 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 is the company's weighted average cost of capital? - ANSWER-9.7% Which two techniques would be considered effective ways to manage the growth of a firm, I additional financing is not available? - ANSWER--increase sales prices -alter capacity Partial financial data for a company: Assets 10,000,000 Liabilities 4,000,000 Equity 6,000,000 Sales 25,000,000 Net income 5,000,000 Profit margin 20% Dividends 500,000 Dividend payout ratio 10% ROA 50% ROE 83% - ANSWER-75% A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be 50,000. The company's marginal tax rate is 34%. What is the tax implication on the sale of the new machine at year 5? - ANSWER-34% of 50,000 is tax liabilities of $17,000 What is the acceptance criteria when using internal rate of return to evaluate a project? - ANSWER-Accept when the project is greater than the required return. A company would like to invest in a capital budget project that will be worth $500,000 in 40yrs. How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return? - ANSWER-$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 debt is 8%, and the cost of short term debt is 6%. The marginal tax rate is 35%. What is the weighted average pre tax cost of capital WACC for this company? - ANSWER-A and B have the same relative maturity. What advantage does the capital asset pricing model CAPM have over the Gordon Growth Model? - ANSWER-CAPM considers risk of a stock relative to the market to determine expected returns. Why do companies strive for a lower cost of capital ? - ANSWER-Less money dedicated to financial 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 firms balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of Rome Red 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 debt is $90 million. Additionally, the firm raised $12.9 million of equity capital. What is the amount of discretionary financing needed? - ANSWER-$7 million Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a $25,000 net margin and 20% dividend payout ratio. What are the forecasted retained earnings for year 2011? - ANSWER-$2,020,000 How is the amount of discretionary financing that is needed by a firm determined? - ANSWER-Projected total assets- projected total liabilities- projected owners equity A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, accounts receivable are 19% of sales, and PP&E are 50% of sales. Accounts payable has been 12% of sales, historically. Shareholders equity is $1.5 million Pro forma income is $3.6 million. The company has no long term debt. What is the total discretionary amount for the pro forma balance sheet? - ANSWER-$1.2 million Which three pieces of data are needed to perform a capital budget analysis? - ANSWER--annual cash flows for the life of the new project -cash flow when the firm terminated the project -the initial cost of the new project What are two examples of sunk costs? - ANSWER--the cost of a market study conducted prior to the decision -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 the two companies? - ANSWER-Company ABC has lower risk than company XYZ. Which action is an important part of managing accounts receivable? - ANSWER-Setting credit terms. What is the main benefit associated with holding inventory? - ANSWER-It makes it possible to meet the demands of customers. A person needs to determine the cost to replace a company's PP&E using the replacement cost method. Which value does this person need to consider in order to make this determination? - ANSWER-Market value Which type of investment will a risk-averse investor most likely invest in? - ANSWER-Index funds [Show Less]
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