AQA • WGU

Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? -Business finance -Real estate -Investments -Financial institutions - A What is the primary difference between finance and accounting? -Accounting involves investing and forecasting, while finance summarizes a company's financial information. -Finance provides financial data to decision makers, and accounting involves making decisions us...

A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? -Let the company manipulate accounting procedures. -Set a strict covenant that the company cannot easily achieve. ...

Accounting - The system of recording, reporting, and summarizing past financial information and transactions. Agency Costs - Costs that are incurred when management does not act in the best interest of shareholders; related to the maximization of shareholder value; firms mitigate some of these costs is by attempting to align managers' interests with shareholders' interests and compensate with shares in the company Agency Problem - When the agent (the management) does not act in the best ...

How is risk defined in finance? - The possibility that the realized or actual return will differ from what we expect The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest rate? - 5% What is another name for the cost of capital? - Discount rate What is the name for the minimum rate of return that an investor or lender will accept for investments? - Required rate of return What is the rate at which the average price level of particular goo...

What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? - Interest rate How is the interest rate expressed? - as a percentage What is the main purpose of charging interest? - It allows borrowers to pay to use the assets of another entity to accomplish their own goals. What is a component of the required rate of return? - Opportunity cost Why would a long-term investment require a higher rate of return? - There is greater risk involved a...

A company that produces soap, shampoo, lotion, and other personal care products has recently taken a hit due to a competitor's new product line. The company decides to reduce wages for its labor force to save money while the company focuses on building up its reputation again, but the company's labor force goes on strike to protest the pay cuts. What type of risk does the strike represent? - Idiosyncratic risk adaptive expectations - When the prices of goods and services go up, employees...

liquidity ratio - is a measure of not only how much cash you have but also how easily you can convert short-term assets into cash. activity ratio - the firm's operational efficiency and profitability. activity ratio - efficiency ratio leverage ratio - financing ratios or solvency ratios leverage ratio - how the firm is financed. profitability ratio - based on either sales or asset investment market ratios - used to evaluate the current share price of a public firm's stock. liquidity ra...

Ratios are useful for analyzing and comparing company performance for at least four different reasons: - Standardization Flexibility Focus Evaluation You can standardize the companies' net incomes by - dividing both by the total sales of those companies. This will help you to see how much income in percentage terms was earned from the total sales made during the year. Standardization - ratios standardize financial data, thus making it comparable across firms—even those of distinctly ...

Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm do in order to be competitive with accounts receivable management in the industry? - Tighten the credit standards for its customers. MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios, but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve its return on equity, which action would help? - Reduce...

A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and weaknesses in cash flows and its budgeting process. Which major use of cash budgeting is this an example of? -Corrective action -Standardization -Assessment of future needs -Performance evaluation - D A company is developing a financial forecast for the next year. The company plans to implement a new factory that will increase production and resulting sales by 20%. Since the company...

Company ABC would like to continue to grow, but in order to maintain control of all decisions and ownership, it wants to avoid issuing new stock. Which calculation will show the company's leadership the fastest that ABC can grow? - Sustainable growth rate How can you use the envelope method of budgeting to monitor cash flows? - Put the amount of money budgeted for each category of your expenses into labeled envelopes and then spend the money in each envelope on expenses in that category. ...

Cash Budgets - Profit Forecasting - Balance Sheet Forecasting - Discretionary Financing Needed - The additional financing needed given a firm's expectations for future growth. Spontaneous Accounts - Accounts that vary naturally with sales. Discretionary Accounts - Accounts that do not vary automatically with sales but are left to the discretion of management. pro forma statements - A financial statement that projects an estimate for future periods "as if" sales grew as predicted. ...

What is the name for a forecast of short-term events that helps a company understand if it has sufficient cash? - Cash budget What is the purpose of a monthly cash budget? - To control cash inflows and outflows so you can balance income with expenditures and savings In which situation would a firm need to borrow cash? - When the beginning cash balance plus the net cash is less than the minimum cash balance required for the month How can you use the envelope method of budgeting to monitor c...

Net Present Value (NPV) - the sum (or net) of the present values of all of the project's expected cash inflows and outflows. Advantages of NPV - Considers time value of money Calculates value added to the firm Considers risk and required return Disadvantages of NPV - Requires calculation of appropriate cost of capital Is not useful to compare projects of varying sizes Internal Rate of Return (IRR) - The rate of return that a firm earns on its capital projects. Hurdle Rate - The required...

A bond becomes "premium" or "discount" once it - begins trading on the secondary market. A company called Bobby's Books is considering purchasing a new bookbinding machine. The company calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase the bookbinding machine? - Yes, because the IRR exceeds the cost of capital. A company is considering five projects that are not mutually exclusive. However, the company does not have enough money to do ...

Beta A variable that describes how the price of a security varies with the market. Business Finance An area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to its owners, and the tools and analysis used to allocate financial resources. Capital Budgeting Criteria Metrics and calculations used to determine whether a project or asset will add value and be a worthwhile investment. Capital ...

Finance vs. Accounting - finance is forward looking accounting is backward looking Accounting - recording, reporting, and summarizing past financial information and transactions finance - management and allocation of capital (money) 3 primary areas of finance - business finance investments financial institutions business of finance - deals with sources of funding Capital Structure - the mixture of debt and equity used to finance a firm Asset Pricing - The process of valuing assets. cur...

Balance Sheet Forecasting - Using sales growth and the profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances Discretionary accounts - Accounts that do not vary proportionally with sales but are decided upon by management Discretionary Financing Needed (DFN) - The additional financing needed given a firm's expectations for future growth How can a firm grow its fixed assets if it is expecting growth but has reached c...

What is a reasonable alternative to keeping an emergency stash of cash? Investing in a savings account Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative. Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm. What is t...

7 What is the term for the risk that changes in interest rates will impact the value of a bond? 1.Interest rate risk 2.Firm-specific risk 3.Default risk 4.Systematic risk - Interest rate risk A company called Bobby's Books is considering purchasing a new bookbinding machine. The company calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase the bookbinding machine? 1.No, because the hurdle rate is lower than the IRR. 2.Yes, because the IR...