WGU C214 Financial Management Exam Study Guide 2024

Trading on the NYSE is executed without a specialist (i.e. a market maker). True or False? - 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? - 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 WGU C214 Financial Management Exam Study Guide 2024 Why would a company be interested in the TAT(Total Asset Turnover) ratio? - Because it shows how efficient assets are at producing sales Which of the following gives the largest effective rate (APY) - If APY was compounded daily opposed to weekly, monthly or yearly 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? - Because it measures the dollar value & it is more reliable 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 it takes to regenerate cash 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 controls audit firms FINRA (Financial Industry Regulatory Authority) does the following: - FINRA regulates hedge funds 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 of the company go up while 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 Operating Income and EBIT are the same, true or false? - True Which components are part of total assets? - Inventory, Cash, Accounts receivable & Long Term assets Which components are part of current assets? - Inventory, Cash, Accounts receivable and Short Term Investments Difference between current assets and total assets? - Total assets = Long term assets Current assets = Short term investments If 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 current ratio for bank loan If an investor knows the idiosyncratic risk, the investor knows the: - Beta coefficient Why would we reject a project based on the NPV? - If the NPV is a negative number Why would we reject a project based on the IRR? - If 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 invests more in 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 will attract more costumers 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 may have a higher inventory turnover/ selling products faster In regards to Accounts Payable balances, which of the following is true - Paying off accounts payable on the last day due is a 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 is higher Dodd-Frank regulates which segment of the U.S. Economy? - Banking industry The SEC Securities & Exchange Commission requires companies to do the following: - Register all public offerings and regulate stock sales Economics is not a subfield of Finance, true or false? - True Capital is defined as a financial asset, true or false? - True Stocks and bonds are two types of financial instruments, true or false? - True Primary financial markets are markets where issuers place new securities with investors, true or false? - True An IPO occurs on the primary market, true or false? - True An IPO is not seasoned equity offering, true or false? - True Syndicates are generally made up of investment banks and other institutional investors, true or false? - True Negotiated sales allow underwriters to submit bids to purchase bonds, just like competitive sales, true or false? - True NASDAQ is the world's largest secondary financial market, true or false? - False Auction markets have a physical location. (T/F) - True Dealer markets do not have a physical location. (T/F) - True Nasdaq is an example of a secondary market. (T/F) - True Stocks that are listed on dealer markets generally have a multiple dealers for each stock. (T/F) - True Markets are where prices are determined (T/F) - True The New York Stock Exchange specialist objective is to provide liquidity to the market. (T/F) - True The NYSE specialist will not charge a higher price to sellers of the stock and a lower price to the buyer of the stock (T/F) - True 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 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 Inefficient markets will often have mis priced securities. (T/F) - 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. (T/F) - True In an inefficient market, prices will slowly respond to new information. (T/F) - 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 be greater than WACC in order to accept a project/investment What is the relationship between NPV and IRR? - If the discount rate ='s 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 controls audited 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 publicly traded 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 a comparable public company Which section of the Statement of Cash Flows describes the production and sales of the firm's product? - CFO 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 PV of anticipated cash flows What explains the size of the yield spread of junk bonds over Treasury? - It is the value of the expected default loss What does Beta measure? - The relative riskiness of an individual stock What is the most effective use of financial statements in valuing a stock? - Use data to estimate future earnings If market interest rates rise, what impact does it have on a given bond? - The bond 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? - Maximization of shareholder wealth strategy, limited access to market financing, 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? - CFO What are the practical disadvantages of the Gordon model for equity valuation? - How to use if no dividends are paid, must project dividends "forever" into the future, does not address the appropriate discount rate What factor determines the "market risk premium" on stocks? - The investor- perceived riskiness of stocks Why would a company buy back outstanding stock? - To boost the price of the stock, increase financial leverage, lack of investment opportunities Which factor does NOT affect a firm's WACC? - The exchange rate Which factor does affect a firm's WACC? - The market risk premium, the tax rate, treasury yields Why should an investor diversify the portfolio? - To achieve a better combination of risk and return, to avoid putting "all eggs in one basket", and bc 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? - Slow sales growth, lower dividend payout, increase the net margin Dodd-Frank regulates which segment of the U.S. Economy? - Banking Industry