WGU C214 Exam Questions With Accurate Answers

Discretionary Financing Needed Formula - Answer Discretionary Financing Needed (DFN) = Projected Total Asset - Projected Total Liabilities - Projected Equity Sustainable Growth Rate Formula - Answer Sustainable Growth Rate (SGR) = Return on Equity (ROE) X (1-Divided Payout Ratio) Cash Flow from Operating Activities (CFO) Formula - Answer Cash Flow from Operating Activities (CFO) = Net Income + Depreciation +/- Decreases/Increases in Current Assets +/- Increase/Decrease in Current Liabilities Cash Flow form Investing Activities (CFI) = Change in PPE + Depreciation - Answer Cash Flow from Investing Activities (CFI) Formula Cash Flow from Financing Activities (CFF) Formula - Answer Cash Flow from Financing Activities (CFF) = Change in Equity + Change in Long Term Debt - Dividends paid Gordon Growth Model Formula - Answer Gordon Growth Model = (Expected Dividend at end of year)/(Required Rate of Return - Dividend Growth Rate) Degree of Operating Leverage (DoL) Formula - Answer Degree of Operating Leverage (DoL) = (Sales Revenue - Variable Cost)/ Net Income Annual Percentage Yield (APY) Formula - Answer Annual Percentage Yield (APY) = (1 + r/n)(n) - 1 r = stated annual interest rate N = number of compounding periods. Income Statement - Answer Revenues = Amount generated by sale of products and services Expenses = Amount incurred to manufacture products Income = The difference between revenues and expenses Balance Sheet - Answer Assets = Items that are owned by the company Liabilities = Amounts owed by the company to others Equity = Invested in the company by shareholders Income Statement (more details) - Answer - 1st financial statement every company must prepare -use accrual principal for both the revenue and expense -revenue must be recorded the moment it is delivered to customer (despite receiving payment) -Expense recorded the moment its incurred What is included in the income statement and not in the statement of cash flows? - Answer Depreciation expense - Necessary to manufacture the product but the company will never pay cash for it. -the value goes down -excluded from statement of cash flows because cash will never be paid for it. -included in income statement Statement of Retained Earnings - Answer It shows how much of the income the company earns every year is distributed in the form of dividends and how much is retained to grow the business. A firm reported sales revenue of $100,000 margin (profit margin) of 25% and dividend payment ratio of 10%. The beginning retained earnings was $20,000. What is the ending retained earnings? - Answer Ending retained earnings = beginning retained earnings + income earned during the year - dividend payment = retained earnings $20,000 + (.25 X 100,000) - (.10 X (.25 X 100,000) = $42,500 - Dividends are paid out of profit Balance Sheet Equation - Answer Assets = Liabilities + Stockholder's Equity Another equivalent of this is Equity = Assets - Liabilities Statement of Cash Flows - Answer - Shows the change in cash balance for a period of time. Statement of Cash Flows Components - Answer 1. CFO = Cash Flow from Operating Activities 2. CFI = Cash Flow from Investing Activities 3. CFF = Cash Flow from Financing Activities CFO (cash generated and used) Formula reminders - Answer -current assets aka operating assets and is usually linked to accounts receivable (AR) -an increase in accounts receivable will cause a minus - current liabilities aka operating liabilities and is usually linked to accounts payable (AP) -an increase in accounts payable will cause a plus (and vice versa) What are the issues with understanding foreign financial statements? - Answer Foreign financial statements use international financial reporting standards and they are different from US accounting standards. What does cash flow from investing activities measure? - Answer It measures investments in long term assets such building, equipment, and machinery. What does the efficient frontier measure? - Answer It maximizes expected return for a given level of risk. What is the objective of portfolio diversification? - Answer The objective is to reduce risk. What is the definition of a current asset and current liability? - Answer A current assets is cash or any other asset that can be converted to cash within 12 months and a current liability is any liability that has to be paid within 12 months. What is differential cash flow? - Answer It is the amount of net cash flow generated a new asset in a yearly basis. What does the current ratio measure? - Answer It is a measure of short term liquidity to pay short term obligations. How does credit rating impact the cost of capital? - Answer A rating downgrade will increase the cost of capital. What is one of the roles of SEC? - Answer It regulates public disclosures of entities that sell debt and equity to the public. What leads to an increase in APY? - Answer An increase in the frequency of compounding - like going from annual to monthly compounding. What bonds are taxed at the federal level? - Answer Treasury bonds What bonds are not taxed at a federal level? - Answer Municipal Bonds What are the two benefits of unbunding and offshoring? (it relates to global finance) same as outsourcing. - Answer - It reduces costs and results in higher sales and employment. - It allows for sale of intermediate and final goods at lower prices and increases employment. What are the two basic types of financial instruments? - Answer Stocks and bonds What are primary and secondary markets? - Answer Primary markets are where companies directly sell securities to investors (they have an IPO) and secondary markets are where bought and sold from third parties like the New York Stock Exchange. What is one of the roles of SEC? - Answer It regulates companies that sell debt and equity to the public. - Companies file a prospectors (describe business plan and provide sate to get permission from SEC. Two exceptions where a company does not have to get permission from SEC. - Answer 1. When a company want to sell equity to a foreign investor (Regulation S). 2. When a company wants to sell equity to a large institutional investor like a retirement fund (Rule 144A). Dodd-Frank Act enacted by Congress in 2009 - Answer Regulates the banking industry. Two type prohibition in the Dodd-Frank Act - Answer 1. The Volcker Rule = limits the amount of money banks can invest in hedge funds 2. The financial stability oversight council. - Answer It does an annual stress test on any US bank to ensure that they can withstand any future financial crisis. Sarbanes-Oxley Act - Answer Requires every company to have a strong internal control system and requires auditors to FINDRA: Financial Industry Regulatory Authority - Answer Regulates stock brokers in the US. All stock brokers must be a member and maintain detailed documentations of their sales practices. The Foreign Corrupt Practices Act of 1977 - Answer Prohibits certain classes or persons and entities from making payments to foreign government officials to assist in obtaining or retaining business. What is an example of a timing difference? - Answer Companies using different fiscal years. Do stock holders or bond holders have voting rights? - Answer Stockholders have voting rights. What factors are considered for the initial outlay of a new investments? - Answer Purchase price of new equipment, shipping costs, and investment in working capital.