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WGU D775 Introduction to Business Finance –
Study Guide
1. Retained Earnings - ANSWER Used to fund an expansion when the
company prefers to use internal funds instead of seeking external funding
options.
2. New Capital Needs - ANSWER To fund expansion and new product
development.
3. Common Stock Financing - ANSWER Best option when projected high
returns are likely to attract new investors.
4. Debt Capital Hesitation - ANSWER Taking on additional debt could
increase the company's default risk and raise its cost of capital.
5. Payback Method Limitation - ANSWER Ignores cash flows after the initial
investment is recovered.
6. Capital Budgeting Decision - ANSWER Required for expanding to a new
market.
7. Cash Flow Example - ANSWER Initial investment: $100,000; Year 1 cash
inflow: $40,000; Year 2 cash inflow: $50,000; Year 3 cash inflow: $30,000.
8. NPV Calculation - ANSWER The calculated NPV is approximately −
$3,900.
9. Project Profitability Indication - ANSWER The project is not profitable and
should be rejected.
10.Employee Wages & Benefits - ANSWER Increased to retain talent.
11.Divestiture - ANSWER To divest of low-margin products to increase
margins.
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12.Financial Stability Impact - ANSWER The project will increase debt
significantly.
13.Risk-return trade-off - ANSWER A principle that guides business finance to
optimize resource use.
14.Capital raising - ANSWER Securing funding for business operations and
projects.
15.Money management activity - ANSWER Involves the creation, circulation,
and management of money.
16.Financial ratios - ANSWER Company 'vital signs' used to diagnose financial
health; they help you ask better questions, not give final answers.
17.Balance sheet - ANSWER Snapshot of what a company owns (assets) and
owes (liabilities) at one point in time.
18.Income statement - ANSWER Video of performance over a period; shows
revenue, expenses, and profit.
19.Liquidity ratios - ANSWER Measure ability to pay short-term bills; 'Can we
survive/pay payroll soon?'
20.Activity/Efficiency ratios - ANSWER Measure how well assets are used to
generate sales; 'Are we using our stuff well?'
21.Leverage ratios - ANSWER Measure debt use and financial risk; 'How much
risky rocket fuel (debt) are we using?'
22.Profitability ratios - ANSWER Measure how well the company turns
sales/assets/equity into profit; 'Are we making real money?'
23.Market ratios - ANSWER Link accounting/book values to investor market
values; 'What do investors think we're worth?'
24.Current ratio - ANSWER Current Assets / Current Liabilities; broad short-
term liquidity check.
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25.Quick ratio (acid test) - ANSWER (Current Assets − Inventory) / Current
Liabilities; stricter liquidity—inventory may be hard to sell quickly.
26.Cash ratio - ANSWER Cash (and sometimes marketable securities) / Current
Liabilities; toughest liquidity stress test.
27.Liquidity pattern - ANSWER Current → Quick → Cash = easier → stricter
→ strictest liquidity measures.
28.Total asset turnover - ANSWER Sales (Revenue) / Average Total Assets;
overall efficiency of assets generating sales.
29.Fixed asset turnover - ANSWER Sales (Revenue) / Average Fixed Assets
(PPE); efficiency of long-term assets generating sales.
30.Debt-to-assets ratio - ANSWER Total Liabilities / Total Assets; proportion
of assets financed by debt.
31.Debt-to-equity ratio - ANSWER Total Liabilities / Shareholders' Equity;
compares debt financing to owner financing.
32.Times interest earned (TIE) - ANSWER EBIT / Interest Expense; ability to
cover interest payments (higher = safer).
33.Low TIE warning - ANSWER Low TIE is a red flag: profits may not cover
interest payments comfortably.
34.Gross margin - ANSWER (Sales − COGS) / Sales; profit after direct costs
(before operating expenses).
35.Operating margin - ANSWER EBIT / Sales; profitability from core
operations (before interest and taxes).
36.Net profit margin - ANSWER Net Income / Sales; 'cents kept' from each
dollar of sales.
37.Return on assets (ROA) - ANSWER Net Income / Average Total Assets;
profit generated per dollar of assets.
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38.Return on equity (ROE) - ANSWER Net Income / Average Equity; return
earned for owners/shareholders.
39.Book value - ANSWER Accounting value (Assets − Liabilities = Equity);
based on historical costs.
40.Market value - ANSWER What investors are willing to pay today; reflects
expectations, risk, and growth prospects.
41.Earnings per share (EPS) - ANSWER (Net Income − Preferred Dividends) /
Weighted Average Shares Outstanding.
42.Price-to-earnings (P/E) ratio - ANSWER Market Price per Share / EPS; how
much investors pay for $1 of earnings.
43.Time value of money (TVM) - ANSWER $1 today is worth more than $1
tomorrow due to risk, opportunity cost, and inflation.
44.Compounding - ANSWER Moving money forward in time (PV → FV) by
earning interest on interest.
45.Discounting - ANSWER Moving money backward in time (FV → PV)
using a discount rate.
46.Annuity - ANSWER A series of equal payments at regular intervals (e.g.,
mortgage, car payments).
47.Capital budgeting - ANSWER Process of evaluating long-term projects by
comparing PV of cash inflows to costs using the cost of capital.
48.Cost of capital - ANSWER Required rate of return demanded by lenders and
investors; the project 'hurdle rate.'
49.NPV (Net Present Value) - ANSWER NPV = PV of future cash inflows −
initial cost; value created in today's dollars.
50.IRR (Internal Rate of Return) - ANSWER Discount rate that makes NPV =
0; project's implied rate of return.
WGU D775 Introduction to Business Finance –
Study Guide
1. Retained Earnings - ANSWER Used to fund an expansion when the
company prefers to use internal funds instead of seeking external funding
options.
2. New Capital Needs - ANSWER To fund expansion and new product
development.
3. Common Stock Financing - ANSWER Best option when projected high
returns are likely to attract new investors.
4. Debt Capital Hesitation - ANSWER Taking on additional debt could
increase the company's default risk and raise its cost of capital.
5. Payback Method Limitation - ANSWER Ignores cash flows after the initial
investment is recovered.
6. Capital Budgeting Decision - ANSWER Required for expanding to a new
market.
7. Cash Flow Example - ANSWER Initial investment: $100,000; Year 1 cash
inflow: $40,000; Year 2 cash inflow: $50,000; Year 3 cash inflow: $30,000.
8. NPV Calculation - ANSWER The calculated NPV is approximately −
$3,900.
9. Project Profitability Indication - ANSWER The project is not profitable and
should be rejected.
10.Employee Wages & Benefits - ANSWER Increased to retain talent.
11.Divestiture - ANSWER To divest of low-margin products to increase
margins.
, 2
12.Financial Stability Impact - ANSWER The project will increase debt
significantly.
13.Risk-return trade-off - ANSWER A principle that guides business finance to
optimize resource use.
14.Capital raising - ANSWER Securing funding for business operations and
projects.
15.Money management activity - ANSWER Involves the creation, circulation,
and management of money.
16.Financial ratios - ANSWER Company 'vital signs' used to diagnose financial
health; they help you ask better questions, not give final answers.
17.Balance sheet - ANSWER Snapshot of what a company owns (assets) and
owes (liabilities) at one point in time.
18.Income statement - ANSWER Video of performance over a period; shows
revenue, expenses, and profit.
19.Liquidity ratios - ANSWER Measure ability to pay short-term bills; 'Can we
survive/pay payroll soon?'
20.Activity/Efficiency ratios - ANSWER Measure how well assets are used to
generate sales; 'Are we using our stuff well?'
21.Leverage ratios - ANSWER Measure debt use and financial risk; 'How much
risky rocket fuel (debt) are we using?'
22.Profitability ratios - ANSWER Measure how well the company turns
sales/assets/equity into profit; 'Are we making real money?'
23.Market ratios - ANSWER Link accounting/book values to investor market
values; 'What do investors think we're worth?'
24.Current ratio - ANSWER Current Assets / Current Liabilities; broad short-
term liquidity check.
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25.Quick ratio (acid test) - ANSWER (Current Assets − Inventory) / Current
Liabilities; stricter liquidity—inventory may be hard to sell quickly.
26.Cash ratio - ANSWER Cash (and sometimes marketable securities) / Current
Liabilities; toughest liquidity stress test.
27.Liquidity pattern - ANSWER Current → Quick → Cash = easier → stricter
→ strictest liquidity measures.
28.Total asset turnover - ANSWER Sales (Revenue) / Average Total Assets;
overall efficiency of assets generating sales.
29.Fixed asset turnover - ANSWER Sales (Revenue) / Average Fixed Assets
(PPE); efficiency of long-term assets generating sales.
30.Debt-to-assets ratio - ANSWER Total Liabilities / Total Assets; proportion
of assets financed by debt.
31.Debt-to-equity ratio - ANSWER Total Liabilities / Shareholders' Equity;
compares debt financing to owner financing.
32.Times interest earned (TIE) - ANSWER EBIT / Interest Expense; ability to
cover interest payments (higher = safer).
33.Low TIE warning - ANSWER Low TIE is a red flag: profits may not cover
interest payments comfortably.
34.Gross margin - ANSWER (Sales − COGS) / Sales; profit after direct costs
(before operating expenses).
35.Operating margin - ANSWER EBIT / Sales; profitability from core
operations (before interest and taxes).
36.Net profit margin - ANSWER Net Income / Sales; 'cents kept' from each
dollar of sales.
37.Return on assets (ROA) - ANSWER Net Income / Average Total Assets;
profit generated per dollar of assets.
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38.Return on equity (ROE) - ANSWER Net Income / Average Equity; return
earned for owners/shareholders.
39.Book value - ANSWER Accounting value (Assets − Liabilities = Equity);
based on historical costs.
40.Market value - ANSWER What investors are willing to pay today; reflects
expectations, risk, and growth prospects.
41.Earnings per share (EPS) - ANSWER (Net Income − Preferred Dividends) /
Weighted Average Shares Outstanding.
42.Price-to-earnings (P/E) ratio - ANSWER Market Price per Share / EPS; how
much investors pay for $1 of earnings.
43.Time value of money (TVM) - ANSWER $1 today is worth more than $1
tomorrow due to risk, opportunity cost, and inflation.
44.Compounding - ANSWER Moving money forward in time (PV → FV) by
earning interest on interest.
45.Discounting - ANSWER Moving money backward in time (FV → PV)
using a discount rate.
46.Annuity - ANSWER A series of equal payments at regular intervals (e.g.,
mortgage, car payments).
47.Capital budgeting - ANSWER Process of evaluating long-term projects by
comparing PV of cash inflows to costs using the cost of capital.
48.Cost of capital - ANSWER Required rate of return demanded by lenders and
investors; the project 'hurdle rate.'
49.NPV (Net Present Value) - ANSWER NPV = PV of future cash inflows −
initial cost; value created in today's dollars.
50.IRR (Internal Rate of Return) - ANSWER Discount rate that makes NPV =
0; project's implied rate of return.
