D076 WGU Principles of Finance EXAM

1 What is the primary goal of the financial manager of a firm? - To maximize owner wealth 3 What is the primary aim of personal finance goals? - To maximize satisfaction from products purchased and services obtained 3 Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? - Investments A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? - Performance evaluation A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company's assets are increasing significantly, what else must increase? - Financing A company is trying to decide which of four projects to invest in. - The one with highest NPV amount A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of? - Making financing decisions A firm has paid off its short-term loans more quickly in the past couple of years. What might this trend indicate about the firm's financial ratios? - Its liquidity ratio is increasing. Liquidity is a measure of the ability of a firm to convert short-term assets into cash. Paying off short-term loans quickly is an indication that a firm is quite liquid, so the firm's liquidity ratio would be increasing. A firm is currently operating at 75% capacity with current sales of $34 million. Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6 million next year? - No, because the increase in sales will not exceed the firm's sales capacity. A hypothesized estimate of future returns under different scenarios based on expectational data - An expected return A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? - Investment bank A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? - When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market. A pharmaceutical company recently spent $2 million developing a new drug. The company then conducts capital budgeting analysis to determine if it should produce the newly developed drug. The net present value (NPV) of the project is $1.5 million. Why should this company produce the drug? - Because the NPV is greater than zero A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? - Primary market About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy? - It may indicate an economic downturn. Since the long-term Treasury interest rate is lower than the short-term rate, it has an inverted yield curve, which may indicate an economic downturn. Activity ratios - measure how well the company uses its assets to generate sales or cash—the firm's operational efficiency and profitability. An employee was recently hired as a financial analyst and asked to create a cash budget for the employee's division for the next year. Which component should the employee exclude from the budget? - Purchase of equipment that will be bought in three years An energy company discovers that a new bill has been proposed to change the amount of fuel that can be exported outside the country. If passed, this could have a serious negative effect on the company's revenues. Some of the company's competitors are obtaining insurance policies to compensate for this risk, but since the energy company believes the likelihood of this bill passing is low, it chooses to do nothing—ultimately taking responsibility for this particular risk instead of trying to transfer the risk through an insurance policy. Which risk management technique is this choice an example of? - Risk Retention An investment analyst is concerned about a construction company's ability to sell its inventory to meet current obligations, because much of the inventory (commercial buildings) it builds and sells takes longer than a year to construct. Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's ability to meet current obligations? - Quick ratio An investor is reviewing the bonds of four different companies: Company A issues AA-rated bonds. Company B issues A-rated bonds. Company C issues BB-rated bonds. Company D issues C-rated bonds. Which company is likely to provide the lowest rate of return to the investor? - Company A An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this? - A discount bond. When the market price is less than the par price of a bond, you know that the YTM is currently higher than the coupon rate of that particular bond, so it is being sold at a discount. An investor really cares about having voting rights in a firm. Which type of financial security should this investor purchase? - Common stock As an active investor, Maria is analyzing her portfolio to decide if there are any stocks she should remove from her pool of financial securities. A company she has invested in, Quiet Flag Industries, just released its annual report. Which kind of method should Maria use to see if the company has improved? - Trend analysis Capital Market - More often used for long-term assets that are held for greater than one year (ex: stock markets and bond markets). Coincident indicators - Help analysts see the big picture of economic trends. Common stock - A type of stock that represents equity in a firm and confers the right to vote at shareholder meetings. Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company's leadership the fastest that ABC can grow? - Sustainable growth rate Components of Required Rate of Return - Opportunity cost Risk Inflation Depository institution - An institution that accepts and pays interest on deposits of money, as well as extends loans (banks, credit unions). discount bond - A bond whose price is below its par value. Diversification - the process of "spreading" your money over many different assets.