WGU C214 Concepts Only Multi Choice Version Exam

Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) - False Stocks and bonds are two types of financial instruments (T/F) - True The matching principle in accrual accounting requires that: - Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. A basic equation for the balance sheet is: - Equity = Assets - Liabilities Why is the Balance Sheet known as a permanent statement? - Because the other statements are reset at the end of the fiscal year How do you calculate the change in Retained Earnings? - Net Income - Dividends Which of the following is generally true? - Operating Income and EBIT are the same Which components are part of total assets? - Cash Accounts Receivable, Inventory, Long Term Assets Which components are part of current assets? - Inventory, Cash, Accounts Receivable, Short Term Investments Which components are part of Total Liabilities? - Bonds, Accounts Payable, Mortgage When Fixed Assets increase what happens to Cash? - Cash decreases Which is the purpose of the statement of cash flows? - explains the change in cash balance for one period of time The OIROI (Operating Income Return on Investment) uses what elements on the income statement? - EBIT, Total Assets Why would a company be interested in the TAT-Total Asset Turnover-ratio? a - How efficient assets are at producing sales Which of the following gives the largest effective rate (APY) - 18.6% compounded daily What does the beta coefficient represent? - It is a statistically-derived measure of volatility Why is depreciation expense taken out of the net income calculation, yet added back at the end? - Because depreciation expense is tax deductible Why is the NPV preferred over the IRR? Pick Two - 1-It measures the dollar value 2- It is harder to calculate What does the Degree of Financial Leverage indicate? - The reliance on debt If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? - Higher profits to shareholders What is the cash cycle? - The amount of time to regenerate cash Why is float important to understand? - To time cash expenditures What should a company do to manage its working capital? - Collect quickly and pay slowly What would be a source of information to determine Replacement Cost? - Building Appraisal What does the Sarbanes-Oxley Act require companies to do? - Have internal control audits FINRA (Financial Industry Regulatory Authority) does the following: (pick one) - Prosecutes naughty stock brokers If a product is made 100% domestically, what can affect its domestic market? - International competition If a company makes its product in a foreign country where labor costs are much lower, what happens? - Profits go up and domestic employment decreases. If the value of a dollar increases, the price of imports: - Decreases Why would a farmer buy a hedge when he signs a contract to sell produce overseas? - To reduce currency risk A basic equation for the balance sheet is: - Equity = Assets - Liabilities Why is the Balance Sheet known as a permanent statement? - Because the other statements are reset at the end of the fiscal year How do you calculate the change in Retained Earnings? - Net Income - Dividends Which of the following is generally true? - Operating Income and EBIT are the same Which components are part of total assets? - Cash Accounts Receivable, Inventory, Long Term Assets Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments - Inventory, Cash, Accounts Receivable, Short Term Investments Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely? - The firm has too little inventory resulting in lost sales or stock-outs. If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? - higher If an investor knows the idiosyncratic risk, the investor knows the: - Beta Coefficient Why would we reject a project based on the NPV? - the NPV is a negative number Why would we reject a project based on the IRR? - the discount rate is higher than the IRR Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? - company B invest in more working current assets Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the credit policies of each company? - company A can attract more customers Which of the following characterizes collection float - increased float indicates slower processing time Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? - company B might have higher inventory turnover In regards to Accounts Payable balances, which of the following is true: - paying off Accounts Payable on the last day due is good policy If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? - the value of company Z id higher Dodd-Frank regulates which segment of the U.S. Economy? - banking industry The SEC Securities & Exchange Commission requires companies to do the following: (pick two) - 1-register all public offering 2-regulates stock sales false. Economics is a subfield of Finance (T/F) - False Capital is defined as a financial asset. (T/F) - True Stocks and bonds are two types of financial instruments (T/F) - True Primary financial markets are markets where issuers place new securities with investors. (T/F) - True An IPO occurs on the primary market (T/F) - True false. An IPO is a seasoned equity offering (T/F) - False Syndicates are generally made up of investment banks and other institutional investors (T/F) - True false. While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. (T/F) - False faslse. NASDAQ is the world's largest secondary financial market. (T/F) - False Auction markets have a physical location. (T/F) - True false. Dealer markets have a physical location. - False false. Nasdaq is an example of an auction market. - False false. Stocks that are listed on dealer markets generally have a single dealer for each stock. - False Markets are where prices are determined (T/F) - True The NYSE specialist has an objective to provide liquidity to the market. (T/F) - True false. The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock - False The bid-ask spread is compensation to the specialist for providing liquidity to the market. (T/F) - True A market order to buy a stock would execute at the current ask price (T/F) - True A market order to sell a stock would execute at the current ask price (T/F) - True false. A limit order to buy a stock at $101.55 would execute at the current ask price (T/F) - False A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55 (T/F) - True false. Efficient markets are those in which prices are volatile - False false. Efficient markets will often have mispriced securities - False false. Inefficient markets are those in which prices will respond quickly to new information - False Inefficient markets will often have mispriced securities. - True Because in an efficient market all available information is built into the price of a stock - investment patterns and trends to "get rich quickly" are not easily discernable and it is difficult to predict the price - True In an inefficient market, prices will slowly respond to new information. - True In an efficient market, new information will move prices almost immediately (T/F) - True What is the relationship between WACC and IRR? - IRR must exceed WACC to accept investment What is the relationship between NPV and IRR? - if discount rate equals IRR, NPV is equal to zero If a firm's financial and operating leverage is high, what is the implication? - profits are more volatile as sales fluctuate If an industry, such as autos, has very high fixed costs and very cyclical sales, what is the implication for financial leverage? - use low financial leverage to offset high operating leverage The SGR measures: - potential sales growth with internal funding The SEC Securities & Exchange Commission requires public companies to do the following: - file audited financial statements with SEC What does the Sarbanes-Oxley Act require companies to do? - have internal control audits If a company produces and sells a product only in the U.S., what international developments may affect its sales? - imports of competing products The SEC requires the following to file audited financial statements: - all publiclytraded corporations Which best describes conceptually the valuation of all financial assets in financial markets? - the NPV of anticipated cash flows Which accurately describes an "efficient" market? - deviations from "fair value" are quickly eliminated If a firm's goal is to maximize stockholder wealth, which would the firm avoid? - investments with negative NPV If you wanted to evaluate a non-public company, what sources would you use? - the PE of comparable public company Which section of the Statement of Cash Flows describes the production and sales of the firm's product? - cash flow operations For calculating cash flows, why is depreciation added to Net Income? - depreciation is a non-cash deduction The fundamental concept underlying the valuation of all financial assets is: - the present value of anticipated case flows What explains the size of the yield spread of junk bonds over Treasury? - it is the value of the expected defaults loss What does Beta measure? - the relative riskiness of an individual What is the most effective use of financial statements in valuing a stock? - use date to estimate future earnings If market interest rates rise, what impact does it have on a given bond? - its price decreases What impact did the recent corporate tax cut have on a firm's WACC? - it increased WACC Why do firms often use "sensitivity" tests in analyzing investment projects - uncertainty of forecast assumptions If debt is less costly than equity, why don't firms maximize debt use? - excessive debt increases risk of bankruptcy Why does a firm's investment opportunities affect it dividend payout ratio? - ALL OF THE FOLLOWING 1 -Maximization of shareholder wealth strategy 2-Limited access to market financing 3-Attempts to increase stock price If two annuities have the same payments and term, why is an Annuity Due more valuable than an Ordinary Annuity? - annuity due payments occur earlier What is the impact of rising interest rates on foreign exchange? - increases the value of USD In cash flow statements, which section reflects so-called "spontaneous" accounts which vary with sales? - cash flow operations What are the practical disadvantages of the Gordon model for equity valuation? - ALL OF THE FOLLOWING a. How to use if no dividends are paid b. Must project dividends "forever" into the future. c. Does not address the appropriate discount rate What factor determines the "market risk premium" on stocks? - The investorperceived riskiness of stocks Why would a company buy back outstanding stock? - ALL OF THE FOLLOWING a. To boost the price of the stock b. To increase financial leverage c. Lack of investment opportunities Which factor does NOT affect a firm's WACC? - The exchange rate Why should an investor diversify the portfolio? - ALL OF THE FOLLOWING a. To achieve a better combination of risk and return b. To avoid putting "all eggs in one basket" c. Stock returns are a function of systematic risk Which statement about a PE ratio is false? - Low PE stocks are cheap If a firm cannot access markets sufficiently to meet their DFN, what strategies might they use? - ALL OF THE FOLLOWING a. Slow sales growth b. Lower dividend payout c. Increase the net margin Dodd-Frank regulates which segment of the U.S. Economy? - banking industry Which is not true of both stocks and bonds - have voting rights The value of a corporation is best measured by - market capitalization Which is not a component of the DuPont formula? - debt to equity ratio What metric converts FV to PV? - the discount rate The interest rate on a corporate bond does not reflect - face value PV ordinarily is less than FV. What would cause the opposite? - negotiate interest rates Which would likely have the lowest price? - zero coupon bond Junk bonds are those whose rating is below - BBB Diversification protects against - market risk Which is the best diversification for stock investment? - auto company and grocery chain If you are assessing a firm's ability to meet short term obligations, you would use which ratio? - quick ratio To assess firm efficiency, which ratio would you use? - asset turnover Which would have the highest value? - gross margin Which is the most important profit ratio? - return on equity