WGU - C214 Financial Management – Final Exam Questions with correct Answers

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. Cash 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 will be less than GAAP Taxes.