D076 WGU question and answers rated A+

Beta A variable that describes how the price of a security varies with the market. Business Finance An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources. Capital Budgeting Criteria Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment. Capital Investment The sum of money invested in a business to purchase long-term assets to further its objective of maximizing owner wealth. Capital Structure The mixture of debt and equity used to finance a firm. Cumulative A feature of preferred stock specifying that if a company skips payment of a preferred stock dividend one year, it is still required to pay that dividend sometime in the future before paying any common dividends. Defensive Assets Companies or securities with beta less than 1. Discount Rate The name for interest rate when used in time value of money calculations. Dividend Discount Model A model used to evaluate common stock that calculates the value of a share of common stock today by taking the present value of future dividend cash flows. Efficient market A market in which prices fully relect all the available information about a specific security. Holding Period Return The return over the entire period that an investor owns a financial security. Internal Rate of Return (IRR) The rate of return that a firm earns on its capital projects. Market Risk Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or nondiversifiable risk. Market-to-book Ratio (M/B Ratio) A market ratio found by market value of equity divided by book value of equity. Nonsystematic Risk Risk that results from factors at a particular firm and can be reduced through diversification; also called firm-specific risk or idiosyncratic risk. Perpetuity Model A formula used to value preferred stock that is based on the calculation of a perpetuity. Plowback Ratio The percent of net income retained in the firm; also called the retention ratio. Quick Ratio A liquidity ratio found by current assets less inventory, divided by current liabilities; also called the acid- test ratio. Return On Assets (ROA) A profitability ratio found by net income divided by total assets. Return The money gained or lost on an investment over a certain period of time. Risk Retention A decision to take responsibility for a particular risk. Securitization The process of combining several types of contractual debt (such as mortgages) and reselling them as a package to investors. Upside Potential The unlimited earnings potential of equity ownership. Variable Expenditures An expense that you have direct control over and that can change from period to period. Profitability Which type of ratio should be used to examine the cost efficiency of a firm's production? Current ratio Which ratio helps an analyst evaluate whether a company can cover its short-term obligations? Quick ratio Which ratio should an analyst use to consider the effect of a firm's inventory on a firm's ability to meet current obligations? Why is it important to consider the time value of money in an ideal evaluation method for capital investment? Because the value of a cash flow today is different from the value of a cash flow of the same dollar amount in 10 years Discretionary account What kind of account is Notes payable? Compound Interest equation Total Interest=Principal×(1+Interest Rate)^Number of Periods−Principal Present Value of a Perpetuity equation Present Value=PMT/i What does the DuPont Framework tell us? One is that return on all the investors (debtholders and equity holders) is measured by the firm's profitability and asset usage efficiency. The effect of debt, or in other words, the effect of the capital structure of the firm, appears only on the return on equity. How can you reduce DFN? Slow Sales Growth Examine Capacity Constraints Lower Dividend Payout Increase Net Margin What are the advantages of NPV? NPV: Considers time value of money Calculates value added to the firm Considers risk and required return What should you be aware of when calculating IRR? The solution can only be obtained through trial and error (or interpolation). What assumptions does the Gordon Growth Model make in order to make the dividend discount model usable? Dividends are paid every year. Dividends grow at a constant rate forever What should you considering in the capital budgeting process of capital investment? For the capital budgeting process of capital investment, it is essential to consider the time value of money, the risk of a project, and all the cash flows of a project to evaluate whether the project is worthwhile. What is the ideal evaluation method for capital investment? It includes all cash flows that occur during the life of the project. It considers the time value of money. It incorporates the cost of capital—or in other words, the required rate of return on the project. What do market ratios measure? Market ratios are used to evaluate the current share prices of a public firm's stock. Debt-to-Equity Ratio=Total Liabilities/Total Owners' Equity Debt-to-Equity Ratio equation What are profitability ratios used for? Profitability ratios help you understand a company's performance and cost efficiency and thereby measure a company's profitability. What are the three main comparison methods used in ratio analysis?