C214 OA Quick Review Exam with 100% Correct Answers 2023

ncome Statement - Correct answer-Shows all revenues received and all expenses incurred over a specific period of time (NI = Revenue - Expenses) Statement of Retained Earnings - Correct answer-(RE = Beginning RI + NI - Dividends) Over a specific period of time. Balance Sheet - Correct answer-One of the three main financial statements. It is a snapshot of the firm's assets, liabilities, and equity at any point in time. Balance Sheet Equation - Correct answer-(Assets = Liabilities + Owner's Equity) (Equity = Assets - Liabilities) Net PPE - Correct answer-Gross PPE - Accumulated Depreciation Statement of Cash Flows - Correct answer-Shows the change in the cash balance for a period of time. Details: Cash flow from Operating Activities (CFO) Cash flow from Investments (CFI) Cash flow from Financing (CFF) Cash Flow from Operations (CFO) - Correct answer-CFO = NI +Depr Exp -(Δ in Operational Assets) +(Δ in Operational Liabilities) (OL does not include Notes Payable) Cash Flow from Investments (CFI) - Correct answer-CFI = Δ in PPE + Depr Exp Cash Flow from Financing (CFF) - Correct answer-CFF= (Δ in Comm Stock) +(Δ in Long-term Liab) -Dividends Equity Valuation - Correct answer-1) GGM 2) CAPM Gordon Growth Model (GGM) - Correct answer-Assumes annual growth rate of dividend is constant; Stock value equals the dividend divided by the difference of the required return and the dividend growth rate (GGM) Stock Price - Correct answer-= Expected Price/(Required Return - Growth Rate) (GGM) Expected Dividend - Correct answer-= Last Annual Dividend Paid x (1 + Growth Rate) (GGM) Required Return - Correct answer-= (Expected Div/Price) + Growth Rate GGM Terms - Correct answer-V0 - the stock price, or its NPV right now ($) D1 - dividend payment, a year from now ($) Kcs - Cost of Common Stock, or Required Rate of Return (%) g - Growth Rate GGM V0 - Correct answer-V0 = D1/(Kcs - g) GGM Kcs - Correct answer-Kcs = (D1/V0) + g Capital Asset Pricing Model (CAPM) - Correct answer--uses the Efficient Frontier -a model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification CAPM Defitions - Correct answer-Market Return - average return on all US stocks Risk-free Return - US treasury bond yield Beta - index of relative risk of the individual stock Risk-premium - compensation for stock risk vs. "risk-free" rate CAPM Formula - Correct answer-Required Return = Risk-free Rate + (Beta * (Market Return - Risk-free Rate)) Pros/Cons of GGM and CAPM - Correct answer--GGM assumes stable growth and does not incorporate risk. -CAPM allows to determine expected return on stocks and incorporates risk. Single Period Holding Model - Correct answer-V0 = (V1 + D1)/(1+Kcs) Capital Budgeting - Correct answer-the process of planning and managing a firm's longterm investments Capital Budgeting Process - Correct answer-a) Initial Outlay b) Differential Cash flow c) Terminal Cash flow d) NPV e) IRR Net Working Capital (NWC) - Correct answer-current assets - current liabilities Initial Outlay (ICF or IO) - Correct answer-(spending money on new asset, or whatever it costs to bring asset to firm) ICF = Cost of assets + Shipping and Installations + Investments in NWC Differential Cash Flow (DCF) - Correct answer-(making money with asset, deal with other OH costs) DCF = NI + Depr Exp Terminal Cash Flow (TCF) - Correct answer-TCF = Equipment sales (Salvage value) - Tax payments +NWC Recapture Firm Valuation Methods - Correct answer-1) Free Cash Flow to the Firm (FCFF) (Use GGM) 2) Comparables Method (Use P.E.E.P.) Financial and Operating Leverage - Correct answer-EBIT Ratios Calculating EBIT - Correct answer-EBIT = Sales -Variable Costs -Fixed Costs Degree of Operating Leverage (DOL) (business risk) - Correct answer-DOL = (Sales - Variables Cost)/EBIT **DOL relates Sales to EBIT** Degree of Financial Leverage (DFL) (financial risk) - Correct answer-EBIT/(EBIT - Interest) **DFL relates EBIT to Pretax profit** Combined Leverage (DCL) - Correct answer-DCL = (Sales - VC) / (EBIT - Int) **DCL relates EBIT to Pretax profit** Liquidity Ratios - Correct answer-One of the four classifications of ratios designed to measure the ability of a firm to pay its near-term obligations. Bill paying obligations. -Current Ratio -Quick Ratio Liquidity Ratio Examples - Correct answer-Current Ratio = Current Assets / Current Liab Quick Ratio = (Current Assets - Inv) / Current Liab Accounts Receivable Turnover = Credit Sales / AR Average Collection Period (ACP) = 365/AR Turnover Inventory Turnover = COGS/Inv Days on Hands (DoH) = 365/Inv Turnover Efficiency Ratios - Correct answer-One of the four classifications of ratios designed to see how well the firm is using its assets and investments. Asset productivity. -Asset Turnover -Fixed Asset Turnover Efficiency Ratio Examples - Correct answer-Asset Turnover = Sales/Assets Fixed Asset Turnover = Sales/Fixed Assets Operating Income Return on Investment (OIROI) = EBIT/Assets Financing Ratios - Correct answer-One of the four classifications of ratios designed to measure how the firm finances its operations. Reliance on debt vs. equity. -Debt Ratio -Financial Leverage Financing Ratio Examples - Correct answer-Debt Ratio = Total Liab/Total Assets Interest-Bearing Debt to Total Capital (IBDTC) = Interest-Bearing Debt/(Interest-Bearing Debt + O.E.) Times Interest Earned (TIE) = EBIT/Interest Expense Financial Leverage Ratio (FLR) = Assets / Equity Profitability Ratios - Correct answer-One of the four classifications of ratios designed to measure the profitability of the firm. -Return on Equity -Return on Asset Profitability Ratio Examples - Correct answer-Return on Assets (ROA) = Net Income/Assets Return on Equity (ROE) = Net Income/Equity Gross Margin = Gross Profit/Sales Operating Margin = EBIT/Sales Net Margin = Net Income /Sales Pros and Cons of Ratio Analysis - Correct answer-Ratio analysis is only a rough tool. It is the 1st step in looking at comparing a firm. Debt Valuation - Correct answer-Market Rate=Coupon rate; bonds will sell at par value Market Rate Coupon rate; bonds will sell at discount Market Rate Coupon rate; bonds will sell at premium. Market rate also known as yield to maturity. Market rate interest rate what your peers are offering on their bonds. Coupon rate is what you're firm is offering on bonds. Bond Valuation - Correct answer-PV of series of Int pmts + PV of return at maturity ***bond pv is always (-) on calc*** Face Value of Bond - Correct answer-dollar amount of the corporate debt to the investor Bond Coupon Rate - Correct answer-the interest paid on a bond, expressed as a percentage of the bond's par value Bond Interest Payment Date - Correct answer-date when bond interest payments are due (usually semiannually) Bond Maturity Date - Correct answer-date at which bond principal or face value is repaid to the investor Bond Yield/Price Relationship - Correct answer-Inverse relationship. -Increase in yield causes bond price to decrease. -Increase in bond price causes yield to decrease. Market Yield - Correct answer--the interest rate at which the present value of payments promised (legal and binding in bond issuance) by security equals its market price -it is the Required Rate of Return of investors trading in the financial market -it is determined by supply and demand Annual Returns to Stock Investors - Correct answer-Dividends or Capital G/L Calculating Return on Investment - Correct answer-(Dividend + Capital Gain)/Investment Value of Stock - Correct answer-(PV of div payment) + (pv of future sell price) Single Holding Period Model - Correct answer-assumes that an investor buys a stock, holds it for a year and then sells it generating possible dividends & an increase in the price of the stock calculator -use TVM on calculator, CPT for PV -4 values are given APR vs APY - Correct answer-APR - the "quoted" annual rate; the coupon rate of the bond APY - the "effective yield"; incorporating periodicity of interest payments APY = (1+APR/Periods)^(Periods-1) Financial Forecasting - Correct answer-Purpose to predict: how much financing will the firm need in the future? Primary means of convincing others of the economic value of one's ideas regarding capital uses or changes within the firm; assumption driven. Cost of Capital - Correct answer-How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity. Managing Exchange Rate Risk - Correct answer-hedging transactions Devaluation of Currency - Correct answer-Refers to a decrease in the value of a currency in the context of a fixed exchange rate system (to be compared with depreciation, which is a decrease in currency value in the context of a floating (or flexible) or managed exchange rate system). Free Floating Currency - Correct answer-Currency fluctuates based on supply and demand Fixed (Pegged) Currency - Correct answer-Country's monetary authority intervenes to maintain a constant exchange rate Managed (Dirty) Floating Currency - Correct answer-Currency is generally allowed to float but a monetary authority will intervene if necessary Comparative Advantage Theory - Correct answer-Theory that states a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently. -creates the most efficient economy, with the most efficient firms International Currency Risks - Correct answer--FOREX -Political Risk: confiscation -currency restriction -international interest rate fluctuations FOREX - Correct answer-currency is changed to the purchasing product origin currency EUR/USD = 1.15, 1 EUR will become 1.15USD, strong dollar FX Forward Contract - Correct answer-hedged contract between 2 companies FX Futures Contract - Correct answer-hedged trade executed on exchange Strong Dollar Impact - Correct answer--imports become cheaper to consumer -exports to foreign countries become expensive -"trade deficit" widens Interest Rate FOREX - Correct answer--U.S. usually has higher interest rate - causes investors to invest in U.S. Risks Associated with Debt Financing - Correct answer-Too much debt can lead to bankruptcy Primary Markets - Correct answer-The financial market where securities (stocks and/or bonds) are first sold. Secondary Markets - Correct answer-The financial market where securities are traded after the initial issuance. (NYSE) Treasury Bonds (T-Bonds) - Correct answer--type of treasuries which have the longest maturities of all government bonds -taxed at a federal level, NOT state Municipal Bonds - Correct answer-tax-exempt bonds issued by state and local governments Differential Cash Flow - Correct answer-The incremental, annual cash from a project (aka Annual free cash flow) Efficient Frontier - Correct answer-The frontier where various portfolios have the highest ratio of return relative to risk. -maximized, diversified portfolios w no idiosyncratic risk -portfolios below the EF have not eliminated the idiosyncratic risk Compounding APY - Correct answer-Increased frequency of compounding leads to an increase in APY Comparables Method - Correct answer-compare a private firm to a similar public company SEC - Correct answer-Federal Securities and Exchange Commission created by Securities Exchange Act of 1934. -requires a firm going public to have Prospectus -regulate companies that sell debt and equity to the public Rule 144A - Correct answer-Rule that