WGU C214 Financial Management OA questions and answers + detailed rationales

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. True or False?

True

When revenue is matched with cost of sales in an Income statement it is called?

Matching principle

Basic balance sheet equation is what?

Equity = Assets - Liabilities

Why is the balance sheet known as the 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

Sales - Cost of Sales - other expenses =

Operating Income or EBiT

Name four accounts that are part of total assets?

Cash, Accounts receivable, inventory, long term assets

Name three accounts that are part of total liabilities?

Bonds, accounts payable and mortgage

Name four accounts that are part of current assets?

Inventory, cash, accounts receivable and short term investments.

Name three accounts that are only included in cash flow from financing?

Common stock, dividends paid and bonds payable

Define the statement of cash flows?

Calculated for the same period of time as the incomes statement is calculated based on the income statement and changes in the balance sheet is one of the three basic accounting statements.

When fixed assets increase what happens to cash?

Cash will decrease

What is the purpose of the statement of cash flows?

Explains the change in cash over the course of the specified time frame.

Suppose 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

The Operating Income Return on Investment (OIROI) uses what elements on the income statement?

EBIT and total assets

Why would a company be interested in the Total Asset Turnover (TAT) ratio?

To see how efficient are at producing sales

What annual interest will be paid for a zero coupon bond?

0%

What is the most significant characteristic of subordinated debt?

Senior debt is paid off first

If a company wants to increase its debt capital, how will they raise the funds?

Sell bonds

What is the lowest level investment bond

BBB

What can cause the bond price to fluctuate?

A change in the bond rating, a change in the financial condition, general change in interest rates.

What does a company use as security for a bond?

Credit worthiness

Under the efficient market hypothesis, what will companies endeavor to do?

Maximize profits for a given level of risk

What does the beta coefficient represent?

It is a statistically derived measure of volatility.

If an investor knows the idiosyncratic risk, the investor knows the?

Beta Coefficient

Why is the depreciation expense taken out of the net income calculation, yet added back at the end?

Because depreciation expense is tax deductible.

Why would we reject a project based on NPV?

The NPV is a negative number

Why would we reject a project based on IRR?

The discount rate is higher than the IRR

What are two key elements of differential cash flow?

Depreciation expense and net income

Why is the NPV preferred over the IRR?

It measures the dollar value and is more reliable.

When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability?

Higher leverage leads to higher profitability for a given sale level.

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 firms risk profile?

Financial leverage also means that more financing is done through debt, not equity. Higher profits to shareholders.

What is the cash cycle?

The amount of time to regenerate cash.

Why is float important to understand?

To time cash expenditures

What should a company do to manage its working capital?

Collect quickly and pay slowly

Name what characterizes increased collection float?

Increased float indicates slower processing time.

In regards to Accounts Payable Balances, what is a good policy?

Paying off A/P on the last day due is a good policy.

What would be a good source of information to determine replacement cost?

Building Appraisal

Dodd-Frank Act regulates which segment of the U.S economy?

Banking industry

What is the regulatory body that overseas the systematic risk in banking?

Financial stability oversight council

The SEC securities and Exchange Commission requires companies to do the following three things:

Register all public offerings, regulate stock sales and ensure transparency through uniform reporting.

What does the Sarbanes-Oxley Act require companies to do?

Have internal control audits, senior management responsible for signing off on statements and places restrictions on auditors.

Financial Industry Regulatory Authority (FINRA) does the following?

Licenses stock brokers and audits brokerage firms.

If a product is made 100% domestically, what can affect its domestic market?

International competition

If a company makes a product in a foreign country where labor costs are much lower, what happens?

Profits go up and domestic employment decreases.

If the value of a dollar increases, the price of imports does what?

Decreases

Why would a farmer buy a hedge when he signs a contract to sell products oversees?

To reduce currency risk

The goal of a corporation is to?

Minimize risk

Which of the following is not a requirement for an efficient market?

Liquidity

The value of money depends upon?

The timing of receipts, certainty of receipt and riskiness of receipt.

What is the purpose of the SEC 10-K filing?

Prevent monopolies

Which line item is not part of net working capital?

Bonds

Increase in accounts payable, decrease in accounts payable and increase in inventory are examples of cash flow. True/False

False

Net margin is defined as?

Retained earnings / sales

Which item is transferred from the income statement to the balance sheet?

Depreciation expense and addition to retained earnings

What item is added to net income to calculate net cash flow?

Depreciation expense

Which cash flow statement represents cash earned by producing and selling the product?

Cash flow operations

Which ratio reflects a firms reliance on debt financing?

Financial leverage

Which action causes a cash outflow?

Increase in inventory

If two firm use different money valuation methods, it is called?

Accounting Difference

What thee things affect the required return on a security?

Perceived riskiness

Financial decisions of the firm

Trading in financial markets

Which is the most frequent type of transaction in financial markets?

Secondary markets

Which of the 5 white financial function keys represents a series of cash disbursements?

PMT

If payments are made semi-annually, which key inputs must be adjusted?

PMT, I/Y and N

Which can be defined as change in value of cash over time?

Interest rate, inflation rate, and discount rate

Which signifies a need to change the calculator to begin mode?

Recurring payments made at the beginning of the year.

Why is an annuity due more valuable than an ordinary annuity?

Payment are received earlier

Which is always larger?

Future value

If you wanted to create an annuity with annual adjustments for inflation, you would use:

Perpetual growth annuity

Which ratio will always be smaller?

Net margin

If net working capital increases, it causes?

A cash outflow

What feature distinguishes bonds from stocks?

Periodic cash payments must be made to investors and capital gains can be realized by investors.

Yield on a bond can best be described as?

Rate of increase in value if investment

When is the bond yield equal to the coupon rate?

At pr price

For a semi annual pay bond, which inputs must be adjusted?

N, I/Y and PMT

Which describes the relationship between price and yield?

Price increases cause yield decreases

Which does not affect a bonds required yield?

Expected growth rate

A bonds duration causes?

Market risk

If a bonds price is at a discount, then?

Bond yield is more than the coupon rate

What is the difference between common and preferred stock?

Preferred stock dividends are fixed

If rating agencies downgrade a bond from AAA to BBB, what happens?

The bonds price decreases

What are the two sources of profit to an investor?

Dividends and capital gains

Which best describes the market risk premium?

Excess return over risk free rate

What best describes beta?

Stock price volatility relative to market feasibility

Which is not a means of eliminating idiosyncratic risk?

Buy a low beta stock

The required return on stocks is derived from?

Systematic risk

A prudent investor would seek?

Maximize return for investor's risk tolerance

A stock whose return is affected substantially by a recession is?

High beta stock

Which factor does not affect WACC?

Efficiency ratio

Which factor does not impact a stocks price?

Maturity date

If the firm believes that the market under-values its stock, it should?

Buy back stock

A firm is a good investment if?

It's price is less than intrinsic value

Why does a firm calculate WACC?

It is the cost of financing the firm

Which is a difference between stocks and bonds?

Increased required return always reduces price

Which is the correct order in terms of lowest to highest required return?

Secured bonds, preferred stock, common stock

Which measures sales growth that can be financed internally?

SGR

Why are accurate sales forecast desirable?

To plan resource acquisition