WGU- C214 FINANCIAL MANAGEMENT | QUESTIONS AND
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | LATEST
EXAM UPDATE
Capital Budgeting - CORRECT ANSWER - Process used in making
investment decisions involving projects that generate cash flows over a multi-
year time horizon
Initial Outlay cash flows - CORRECT ANSWER - Consists of cost of the
asset, shipping costs, and investment in working capital
Differential Annual cash flows - CORRECT ANSWER - Consists of
incremental cash flows generated every year
Terminal Cash Flow - CORRECT ANSWER - Consists of after tax proceeds
from the sale of an asset and release of working capital
Net Present Value (NPV) - CORRECT ANSWER - The present value of after
tax net cash flows and is the most commonly used method in Capital Budgeting
Efficient Market Hypothesis (EMH) - CORRECT ANSWER - The intrinsic
value of a stock is the Present Value of the stock's after tax net cash flows
Debts - CORRECT ANSWER - Also known as Long Term Liabilities
Stock - CORRECT ANSWER - Also known as Equities
CFF - CORRECT ANSWER - Cash Flows from Financing Activities
,CFI - CORRECT ANSWER - Cash Flows from Investing Activities
CFO - CORRECT ANSWER - Cash Flows from Operating Activities
Statement of Cash Flows - CORRECT ANSWER - Shows the change in cash
balance for a period of time
Prepared for a period of time - CORRECT ANSWER - Income Statement,
Retained Earnings Statement, Statement of Cash Flows
Prepared at a point in time - CORRECT ANSWER - Balance Sheet
Depreciation Expense - CORRECT ANSWER - Included in the income
statement and not included in the statement of cash flows
Revenue Recognition Principle - CORRECT ANSWER - Revenue is
recognized when a product or service is DELIVERED to the customer
Expense Recognition Principle - CORRECT ANSWER - Expenses are
recognized when they are INCURRED by the company
Revenues - CORRECT ANSWER - Amount generated by sale of products and
services
Expenses - CORRECT ANSWER - Amount incurred to manufacture products
Income - CORRECT ANSWER - The difference between revenue and
expenses
Assets - CORRECT ANSWER - Items that are owned by the company
, Liabilities - CORRECT ANSWER - Amounts owed by the company to others
Equity - CORRECT ANSWER - Amounts invested in the company by
shareholders
Internal Rate of Return (IRR) - CORRECT ANSWER - The discount rate that
results in a Zero Net Present Value
What does inflation do to the value of cash flows? - CORRECT ANSWER -
Lowers the value of cash flows
E(r) = Rf + Beta (Rm-Rf) (Risk Premium) - CORRECT ANSWER - Risk Free
(bills are returning X%)
Risk Premium (market is returning X%)
Differential cash flow - CORRECT ANSWER - Net income + depreciation -
increase in working capital
Net Income - CORRECT ANSWER - (Increase in revenue - Increase in
variable and fixed costs - depreciation expense) * (#year e.g. 1 - tax rate e.g.
.40)
Increase in working capital - CORRECT ANSWER - (X% of increase in
revenue * increase in revenue)
Gordon Growth Model (Growth rate of a dividend) - CORRECT ANSWER -
Question will say expected to pay a dividend OR dividend was paid
recently/dividend was just paid
The latter requires computing expected dividend BEFORE price/required return
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | LATEST
EXAM UPDATE
Capital Budgeting - CORRECT ANSWER - Process used in making
investment decisions involving projects that generate cash flows over a multi-
year time horizon
Initial Outlay cash flows - CORRECT ANSWER - Consists of cost of the
asset, shipping costs, and investment in working capital
Differential Annual cash flows - CORRECT ANSWER - Consists of
incremental cash flows generated every year
Terminal Cash Flow - CORRECT ANSWER - Consists of after tax proceeds
from the sale of an asset and release of working capital
Net Present Value (NPV) - CORRECT ANSWER - The present value of after
tax net cash flows and is the most commonly used method in Capital Budgeting
Efficient Market Hypothesis (EMH) - CORRECT ANSWER - The intrinsic
value of a stock is the Present Value of the stock's after tax net cash flows
Debts - CORRECT ANSWER - Also known as Long Term Liabilities
Stock - CORRECT ANSWER - Also known as Equities
CFF - CORRECT ANSWER - Cash Flows from Financing Activities
,CFI - CORRECT ANSWER - Cash Flows from Investing Activities
CFO - CORRECT ANSWER - Cash Flows from Operating Activities
Statement of Cash Flows - CORRECT ANSWER - Shows the change in cash
balance for a period of time
Prepared for a period of time - CORRECT ANSWER - Income Statement,
Retained Earnings Statement, Statement of Cash Flows
Prepared at a point in time - CORRECT ANSWER - Balance Sheet
Depreciation Expense - CORRECT ANSWER - Included in the income
statement and not included in the statement of cash flows
Revenue Recognition Principle - CORRECT ANSWER - Revenue is
recognized when a product or service is DELIVERED to the customer
Expense Recognition Principle - CORRECT ANSWER - Expenses are
recognized when they are INCURRED by the company
Revenues - CORRECT ANSWER - Amount generated by sale of products and
services
Expenses - CORRECT ANSWER - Amount incurred to manufacture products
Income - CORRECT ANSWER - The difference between revenue and
expenses
Assets - CORRECT ANSWER - Items that are owned by the company
, Liabilities - CORRECT ANSWER - Amounts owed by the company to others
Equity - CORRECT ANSWER - Amounts invested in the company by
shareholders
Internal Rate of Return (IRR) - CORRECT ANSWER - The discount rate that
results in a Zero Net Present Value
What does inflation do to the value of cash flows? - CORRECT ANSWER -
Lowers the value of cash flows
E(r) = Rf + Beta (Rm-Rf) (Risk Premium) - CORRECT ANSWER - Risk Free
(bills are returning X%)
Risk Premium (market is returning X%)
Differential cash flow - CORRECT ANSWER - Net income + depreciation -
increase in working capital
Net Income - CORRECT ANSWER - (Increase in revenue - Increase in
variable and fixed costs - depreciation expense) * (#year e.g. 1 - tax rate e.g.
.40)
Increase in working capital - CORRECT ANSWER - (X% of increase in
revenue * increase in revenue)
Gordon Growth Model (Growth rate of a dividend) - CORRECT ANSWER -
Question will say expected to pay a dividend OR dividend was paid
recently/dividend was just paid
The latter requires computing expected dividend BEFORE price/required return
