WGU C214 OA Q&A CHECKLIST
CORRECT QUESTIONS &
ANSWERS(RATED A)
Which will be larger: accrual taxes payable or accounting income tax expense -
ANSWER Accounting tax expense will be higher; actual taxes based on IRS rules will
be lower
Which financial ratios measure "efficiency"? - ANSWER Asset turnover and Fixed Asset
turnover
Which ratio is the best measure of a firm's ability to pay bills? - ANSWER Quick Ratio
Which decision requires using subjective estimates? - ANSWER Economic life of a new
asset
What is the yield to maturity on a bond? - ANSWER The return earned from the
purchase date to maturity
If a firm buys a 30-day CD, where is it carried on the balance sheet? - ANSWER Cash
and ST in current assets
What happens to APY as the number of interest payment periods per year increase? -
ANSWER APY increases
What is the present value of future cash flows of a stock called? - ANSWER Intrinsic
Value
If market price is greater than intrinsic value, should you buy or sell? - ANSWER Sell
In event of bankruptcy, what is the order of claims settlement? - ANSWER Secured
debt, senior debt, subordinated debt, preferred stock, common stock
What is a spontaneous account? - ANSWER One that changes with the level of sales -
current assets & liabilities
What is a discretionary account? - ANSWER One that changes due to the management
decision- bonds outstanding
If the financial ratios of 2 firms are compared, what is it called? - ANSWER Cross-
sectional analysis
, How can a firm encourage customers to pay early? - ANSWER "Discounts" for early
payment
If a loan does not require collateral, what is it called? - ANSWER Unsecured loan
What transaction do firms use to offset foreign exchange risk? - ANSWER Hedging
If the debt ratio increases, what is the likely impact on ROE? - ANSWER It increases
Why is an Annuity Due more valuable than an Ordinary Annuity? - ANSWER Cash
payments are received earlier - beginning of the year rather than end of the year
What discount rate is used to calculate net present value in capital budgeting? -
ANSWER Weighted Average Cost of Capital (WACC) or the "required return"
What financial structure causes profitability to be more volatile? - ANSWER Leverage
If debt is cheaper than equity, why not all debt? - ANSWER Bankruptcy; equity is the
cushion against bankruptcy
The Degree of Financial Leverage reflects what? - ANSWER Firm's reliance on debt
What is a leveraged buyout? - ANSWER A firm issues debt to buy another firm
If interest rates increase, what is the impact on WACC? - ANSWER Required returns on
both debt and equity increase - therefore WACC increases
Why is the required return on stocks higher than bonds? - ANSWER Higher risk
The DuPont formula expands the ROE definition into what 3 ratios? - ANSWER Net
Margin, Total Asset Turnover, and Financial Leverage
What cash balance supports daily operations, that is, spontaneous accounts? -
ANSWER Operating balance, as opposed to Reserve balance
Which cash flow statement reflects the daily operations of the firm? - ANSWER Cash
flow operations
What type of debt has lower claim than bonds in bankruptcy proceedings? - ANSWER
Subordinated debentures, e.g. subordinated debt
In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? -
ANSWER Aversion to realizing losses; prefer to gamble on recovery
More recent research on Modigliani-Miller Theorem (MM) shows what? - ANSWER The
debt-equity ratio does affect the WACC and the value of the firm
CORRECT QUESTIONS &
ANSWERS(RATED A)
Which will be larger: accrual taxes payable or accounting income tax expense -
ANSWER Accounting tax expense will be higher; actual taxes based on IRS rules will
be lower
Which financial ratios measure "efficiency"? - ANSWER Asset turnover and Fixed Asset
turnover
Which ratio is the best measure of a firm's ability to pay bills? - ANSWER Quick Ratio
Which decision requires using subjective estimates? - ANSWER Economic life of a new
asset
What is the yield to maturity on a bond? - ANSWER The return earned from the
purchase date to maturity
If a firm buys a 30-day CD, where is it carried on the balance sheet? - ANSWER Cash
and ST in current assets
What happens to APY as the number of interest payment periods per year increase? -
ANSWER APY increases
What is the present value of future cash flows of a stock called? - ANSWER Intrinsic
Value
If market price is greater than intrinsic value, should you buy or sell? - ANSWER Sell
In event of bankruptcy, what is the order of claims settlement? - ANSWER Secured
debt, senior debt, subordinated debt, preferred stock, common stock
What is a spontaneous account? - ANSWER One that changes with the level of sales -
current assets & liabilities
What is a discretionary account? - ANSWER One that changes due to the management
decision- bonds outstanding
If the financial ratios of 2 firms are compared, what is it called? - ANSWER Cross-
sectional analysis
, How can a firm encourage customers to pay early? - ANSWER "Discounts" for early
payment
If a loan does not require collateral, what is it called? - ANSWER Unsecured loan
What transaction do firms use to offset foreign exchange risk? - ANSWER Hedging
If the debt ratio increases, what is the likely impact on ROE? - ANSWER It increases
Why is an Annuity Due more valuable than an Ordinary Annuity? - ANSWER Cash
payments are received earlier - beginning of the year rather than end of the year
What discount rate is used to calculate net present value in capital budgeting? -
ANSWER Weighted Average Cost of Capital (WACC) or the "required return"
What financial structure causes profitability to be more volatile? - ANSWER Leverage
If debt is cheaper than equity, why not all debt? - ANSWER Bankruptcy; equity is the
cushion against bankruptcy
The Degree of Financial Leverage reflects what? - ANSWER Firm's reliance on debt
What is a leveraged buyout? - ANSWER A firm issues debt to buy another firm
If interest rates increase, what is the impact on WACC? - ANSWER Required returns on
both debt and equity increase - therefore WACC increases
Why is the required return on stocks higher than bonds? - ANSWER Higher risk
The DuPont formula expands the ROE definition into what 3 ratios? - ANSWER Net
Margin, Total Asset Turnover, and Financial Leverage
What cash balance supports daily operations, that is, spontaneous accounts? -
ANSWER Operating balance, as opposed to Reserve balance
Which cash flow statement reflects the daily operations of the firm? - ANSWER Cash
flow operations
What type of debt has lower claim than bonds in bankruptcy proceedings? - ANSWER
Subordinated debentures, e.g. subordinated debt
In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? -
ANSWER Aversion to realizing losses; prefer to gamble on recovery
More recent research on Modigliani-Miller Theorem (MM) shows what? - ANSWER The
debt-equity ratio does affect the WACC and the value of the firm
