WGU D076
Interest rate - ANS percentage of the principle that a lender charges a borrower for the use of
assets.
Cost of capital - ANS Also known as Discount rate, the cost to a firm to use an investor's capital
Simple interest - ANS Annual Interest = Principal x Interest Rate
Total interest - ANS Total Interest = Annual interest x t
Compounding Interest - ANS otal Interest = Principal x (1+Interest Rate/over/
¿ ¿Numbers of periods - Principal
Required rate of return - ANS the rate of return or compensation that an investor or a lender will
accept for investments such as stocks, bonds, or loans.
hurdle rate - ANS The word compensation is used because this is the rate that investors or
lenders will be compensated for a given level of risk associated with investments or loans.
Opportunity cost - ANS the loss of potential gain from other alternatives when one alternative is
chosen.
Risk - ANS possibility that the realized or actual return will differ from the expected return.
Inflation - ANS the rate at which the average price level of goods and services in an economy
increases over a period of time.
Sources of inflation - ANS 1:Increased demand for goods and services
2:Rising costs
3:Adaptive expectations- when prices of goods and services go up, employees expect and even
demand higher wages to maintain their standard of living.
Decomposing Interest Rate - ANS Rate = Risk-Free Rate + Risk Premium
Real rate - ANS same as the growth rate in purchasing power, even though the formula seems
different. This is called the Fisher Effect, an economic theory created by the economist Irving
Fisher.
Why Are Ratios Useful - ANS 1. Standardization- Ratios standardize financial data to make
them comparable across firms, even those of distinctly different sizes.
, 2. Flexibility
3. Focus
4. Evaluation
Benchmarking - ANS the process of completing a financial analysis and comparing a firm's
performance to that of other similar firms is known as benchmarking.
Liquidity - ANS measure a firm's ability to meet short-term obligations without raising external
capital. While everybody is concerned about liquidity, short-term creditors such as banks and
suppliers are particularly interested. Liquidity is a measure of not only how much cash you have
but also how easily you can convert short-term assets into cash.
Liquidity - ANS 1. Current Ratio=Current Assets/Current Liabilities
2. Quick Ratio=Current Assets - Inventory/Current Liabilities
Activity - ANS (also called efficiency ratios) measure how well the company uses its assets to
generate sales or cash—the firm's operational efficiency and profitability.
Account receivable turnover (AR turnover) - ANS Ratios help to identify how quickly these
accounts receivable turnover during a given year.
AR Turnover= Credit Sales/Account Receivable
Average Collection Period (ACP) - ANS An activity ratio found by the number of days in a year
(365) divided by AR turnover.
1. Average Collection Period= 365/AR Turnover
2. Inventory Turnover= COGS/Inventory
3. Total Asset Turnover= Sales/Total assets
4. Fixed asset turnover= Sales/Fixed Assets
Operating income return on investment (OIROI) - ANS OIROI= Operating Income/Total Assets
Leverage - ANS (also called financing ratios or solvency ratios) consider how the firm is
financed.
Leverage - ANS 1. Debt Ratio= Total Liabilities/Total Assets
2. Debt-to-Equity Ratio= Total Liabilities/Total Owners' Equity
3. Times interest earned (TIE)= EBIT/Interest Expense
Probability - ANS can be based on either sales or asset investment. They are commonly used
to directly judge how profitable the company is and how well management is doing as they
strive to maximize owner wealth. Examine the cost efficiency of a firm's production.
Probability - ANS 1. Return on assets (ROA)= Net Income/Total Assets
2. Return on equity (ROE)= Net Income/Owners' Equity
Interest rate - ANS percentage of the principle that a lender charges a borrower for the use of
assets.
Cost of capital - ANS Also known as Discount rate, the cost to a firm to use an investor's capital
Simple interest - ANS Annual Interest = Principal x Interest Rate
Total interest - ANS Total Interest = Annual interest x t
Compounding Interest - ANS otal Interest = Principal x (1+Interest Rate/over/
¿ ¿Numbers of periods - Principal
Required rate of return - ANS the rate of return or compensation that an investor or a lender will
accept for investments such as stocks, bonds, or loans.
hurdle rate - ANS The word compensation is used because this is the rate that investors or
lenders will be compensated for a given level of risk associated with investments or loans.
Opportunity cost - ANS the loss of potential gain from other alternatives when one alternative is
chosen.
Risk - ANS possibility that the realized or actual return will differ from the expected return.
Inflation - ANS the rate at which the average price level of goods and services in an economy
increases over a period of time.
Sources of inflation - ANS 1:Increased demand for goods and services
2:Rising costs
3:Adaptive expectations- when prices of goods and services go up, employees expect and even
demand higher wages to maintain their standard of living.
Decomposing Interest Rate - ANS Rate = Risk-Free Rate + Risk Premium
Real rate - ANS same as the growth rate in purchasing power, even though the formula seems
different. This is called the Fisher Effect, an economic theory created by the economist Irving
Fisher.
Why Are Ratios Useful - ANS 1. Standardization- Ratios standardize financial data to make
them comparable across firms, even those of distinctly different sizes.
, 2. Flexibility
3. Focus
4. Evaluation
Benchmarking - ANS the process of completing a financial analysis and comparing a firm's
performance to that of other similar firms is known as benchmarking.
Liquidity - ANS measure a firm's ability to meet short-term obligations without raising external
capital. While everybody is concerned about liquidity, short-term creditors such as banks and
suppliers are particularly interested. Liquidity is a measure of not only how much cash you have
but also how easily you can convert short-term assets into cash.
Liquidity - ANS 1. Current Ratio=Current Assets/Current Liabilities
2. Quick Ratio=Current Assets - Inventory/Current Liabilities
Activity - ANS (also called efficiency ratios) measure how well the company uses its assets to
generate sales or cash—the firm's operational efficiency and profitability.
Account receivable turnover (AR turnover) - ANS Ratios help to identify how quickly these
accounts receivable turnover during a given year.
AR Turnover= Credit Sales/Account Receivable
Average Collection Period (ACP) - ANS An activity ratio found by the number of days in a year
(365) divided by AR turnover.
1. Average Collection Period= 365/AR Turnover
2. Inventory Turnover= COGS/Inventory
3. Total Asset Turnover= Sales/Total assets
4. Fixed asset turnover= Sales/Fixed Assets
Operating income return on investment (OIROI) - ANS OIROI= Operating Income/Total Assets
Leverage - ANS (also called financing ratios or solvency ratios) consider how the firm is
financed.
Leverage - ANS 1. Debt Ratio= Total Liabilities/Total Assets
2. Debt-to-Equity Ratio= Total Liabilities/Total Owners' Equity
3. Times interest earned (TIE)= EBIT/Interest Expense
Probability - ANS can be based on either sales or asset investment. They are commonly used
to directly judge how profitable the company is and how well management is doing as they
strive to maximize owner wealth. Examine the cost efficiency of a firm's production.
Probability - ANS 1. Return on assets (ROA)= Net Income/Total Assets
2. Return on equity (ROE)= Net Income/Owners' Equity
