WGU D775

Risk-return trade-off

A principle that guides business finance to optimize resource use.

Capital raising

Securing funding for business operations and projects.

Money management activity

Involves the creation, circulation, and management of money.

Common stock

A share of ownership in a firm with voting rights.

Preferred stock characteristic

Fixed dividends.

Purpose of bonds for issuers

To raise capital without diluting ownership.

Junk bonds

Speculative bonds.

Options in financial derivatives

They give the buyer the right, but not the obligation, to buy or sell an asset.

Economies of scale for funds

By making large-scale investments that reduce transaction costs.

Initial public offering (IPO)

The first sale of a company's stock to the public.

Secondary market activity

The trading of stocks on the New York Stock Exchange.

Types of financial markets

Primary markets and secondary markets.

Role of financial regulators

Ensuring fair and transparent markets.

Depository institutions

Institutions that accept deposits and provide loans.

Primary source of revenue for depository institutions

Interest income from loans.

Rising Consumer Price Index (CPI) effect

It indicates increased costs for raw materials and labor.

Return on equity goals

Beating their return on equity goals for each quarter

Environmental, social, and governance (ESG) criteria

Impact of integrating ESG criteria into investment decisions

Long-term risks

Seeking long-term risks to protect stakeholders

Financial ratios for investors

Purpose of using financial ratios for investors

Standardized basis for performance evaluation

How financial ratios help in comparing companies

Performance benchmarking

How financial ratios aid in performance benchmarking

Profitability ratios

What do profitability ratios indicate?

Current ratio

What does the current ratio evaluate?

High average collection period

What does a high average collection period indicate?

High current ratio

What does a high current ratio suggest about a company's financial health?

High accounts receivable turnover rate

What does a high accounts receivable turnover rate indicate?

High debt-to-assets ratio

What does a high debt-to-assets ratio suggest?

High times interest earned ratio

What does a high times interest earned ratio signify?

High return on assets

What does a high return on assets suggest?

Times interest earned ratio

Which ratio reflects an ability to pay interest on debt as it becomes due?

Fixed asset turnover vs return on assets

What is the primary difference between fixed asset turnover and return on assets?

Return on equity

Which ratio identifies the profitability relative to equity?

Firm with low profit margins

A business that operates with minimal profit relative to its sales.

Firm providing mostly services

A company that primarily offers services rather than physical products.

Firm with high debt

A business that has a significant amount of borrowed money compared to its equity.

Firm with high inventory

A company that maintains a large amount of stock in its warehouses or stores.

Inventory turnover ratio

A measure of how efficiently a company sells and replaces its stock of goods.

Goal of increasing inventory turnover

The target of raising the inventory turnover ratio from below 3 to 5.

High quick ratio during economic downturn

Indicates the company can cover obligations without selling inventory.

Debt-to-assets ratio

A financial ratio that indicates the proportion of a company's assets that are financed by debt.

Time-interest earned ratio

A measure of a company's ability to meet its debt obligations based on its earnings.

Least expensive way to finance

Using debt when the firm has favorable leverage ratios.

Profit margins comparison

Analyzing the profitability of two companies based on their profit margins.

Components changing during sales season

Inventory and revenue are expected to fluctuate significantly during peak sales periods.

Strategy for improving liquidity

Increase liquidity through faster collection of receivables.

Decision for low total asset turnover

Eliminate inefficient or unproductive assets.

Metric for year-end bonuses

A financial measure to determine if bonuses can be paid within 30 days.

Company A profit margin

Company A has a profit margin of 35%.

Company B profit margin

Company B has a profit margin of 47%.

Company A locations

Company A operates 2 locations.

Company B locations

Company B operates 10 locations.

High current ratio and low cash ratio

A situation where a company should improve liquidity through faster collection of receivables.

Seasonal sales period

The busiest sales season for retailers is between November 1st and December 31st.

Specialty items in inventory

Carrying more unique or one-of-a-kind items to increase inventory turnover.

Raising prices on slow inventory

A strategy to cover costs associated with unsold inventory.

Profit margin

A measure of a company's profitability, calculated as net income divided by revenue.

Total asset turnover

A financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue.

Quick ratio

A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets.

Return on equity (ROE)

A measure of financial performance calculated by dividing net income by shareholders' equity.

Opportunity cost

The loss of potential gain from other alternatives when one alternative is chosen.

Present value

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Future value

The value of a current asset at a future date based on an assumed rate of growth.

Annuity

A series of equal payments made at regular intervals over time.

Future value interest factor for an annuity (FVIFA)

A factor used to calculate the future value of a series of equal payments at a specified interest rate.

$5,000 for 25 years, earning 8%

A specific investment scenario that describes a deposit of $5,000 growing over 25 years at an 8% interest rate.

$5,000 for 30 years, earning 6%

A specific investment scenario that describes a deposit of $5,000 growing over 30 years at a 6% interest rate.

$5,000 for 30 years, earning 8%

A specific investment scenario that describes a deposit of $5,000 growing over 30 years at an 8% interest rate.

$5,000 for 25 years, earning 6%

A specific investment scenario that describes a deposit of $5,000 growing over 25 years at a 6% interest rate.

Annual payments of $15,000 over 6 years

A payment plan where a total of $90,000 is paid in equal installments over 6 years.

Interest rate (5%)

The percentage at which interest is calculated on an investment or loan.

Bi-annual magazine subscription of $240

An example of an annuity where payments are made twice a year for a total of $240 over 24 months.

Annual insurance premium of $1,200

An example of an annuity where a payment of $1,200 is made once a year for 12 consecutive months.

Credit card payments of equal amounts

Payments made at a constant rate to pay off an outstanding balance on a credit card.

Credit card payments of varying amounts

Payments that fluctuate based on the amount spent in the previous month.

Net Present Value (NPV)

A method used to assess the profitability of an investment by calculating the present value of expected cash inflows and outflows.

Internal Rate of Return (IRR)

The discount rate at which the net present value of an investment becomes zero, indicating the expected annual return of the investment.

Cash Inflows

The expected incoming cash from an investment, which can be projected over multiple years.

Discount Rate

The interest rate used to determine the present value of future cash flows.

Payback Period

The time it takes for an investment to generate an amount of income equal to the cost of the investment.

Hurdle Rate

The minimum acceptable return on an investment that a manager or investor expects to earn.

Cost of Capital

The required return necessary to make a capital budgeting project worthwhile, typically expressed as a percentage.

Project Life

The duration over which a project is expected to generate cash flows.

Investment Evaluation

The process of analyzing the potential profitability and risks associated with an investment.

Taxable Income

The amount of income that is subject to taxation, which can be affected by investment returns.

Economic Trends

Patterns and changes in the economy that can influence investment decisions and forecasts.

Annual Cash Flows

The total cash generated by an investment on a yearly basis.

Investment Cost

The initial amount of money required to start a project or investment.

Risk Assessment

The process of identifying and analyzing potential issues that could negatively impact an investment.

Revenue Calculation

The process of determining the total income generated from an investment before expenses.

Investment Comparison

The analysis of different investment options to determine which one offers the best potential return.

Investment Decision

The choice made by an investor regarding whether to proceed with a particular investment opportunity.

Financial Metric

A standard measure used to assess the financial performance of an investment or company.

Detailed Calculations

In-depth mathematical computations required to evaluate the financial aspects of an investment.

Investment Evaluation Metrics

Quantitative measures used to assess the viability and profitability of investment opportunities.

Investment Return

The gain or loss made on an investment relative to the amount invested.

Total Revenue

Determines the company's borrowing capacity.

Cost of Debt

Equal to the after-tax cost of debt, as no equity financing costs are involved.

Dividends Paid

The company must satisfy its debt holders.

High Beta

Indicates higher risk, which requires higher returns.