WGU C214 Pre-Assement

How can a private firm appropriately maximize shareholder value?

By making decisions that keep the control of the business with the owners

Why are American regulators focused on international investing in a global marketplace?

Because international investing in a global marketplace is the concern of

American investors

What is one of the two basic types of financial instruments?

Bonds

If a company outsources the manufacturing of its products to a foreign country, what are the likeliest

outcomes?

Consumer prices will decrease and Domestic employment will decrease.

What is true about the content and structure of a balance sheet?

It reports the assets, liabilities, and equity at a point in time.

A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this

amount is expected to be collected next period.

How will this change in accounts receivable affect the cash flows from the operating activities section?

The change will decrease cash flows from operations by $5,000.

Which statement accurately explains the recognition of revenues and expenses under accounting income

and income for tax purposes?

Revenues and expenses may be recognized in one period for accounting income purposes and in a different period for income tax purposes.

Selected Data for 20x2 for ABD Inc.

Netincome $ 1,000

Depreciation expense $ 300

Change in operating assets $ 600

Change in net property, plant, and equipment$ 5,000

Changes in long-term liabilities $ 1,000

Dividends paid $ 200

What is the firm's cash flow from investments, using the data above and assuming no asset disposals?

$5,300 outflow

What is the basic equation for a balance sheet?

Assets = Liabilities + Equity

What do cash flows from investing activities generally relate to?

A firm's purchase and sale of long-term assets

Which transaction is reflected in cash flow from operating activities?

Cash sales to customers

What does free cash flow represent?

Cash available for distribution after funding required reinvestment

An analyst is comparing the ratios of two firms and needs to address timing differences. What would be considered an example of a timing difference between the two firms?

The firms have different fiscal years.

A company's year-end balance sheetfor 2013 shows the following:

Accounts receivable: $900

Inventory: $1200

Fixed assets: $1000

Accounts payable: $1300

Sales: $4000

Salaries expense: $275

What is their fixed asset turnover ratio?

4.0

A firm has a ROE (return on equity) of 0.27 and the industry average ROE is 0.24. Which conclusion would an analyst draw when comparing the firm to the industry?

The firm is generating higher returns to owners than the industry.

What must have taken place for a firm to recognize revenue, in order for the firm to comply with the accrual accounting rules?

The product must have been delivered.

A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded

annually).

How much will the teacher have in principal and interest at the end of the 5 years?

$121,665

An accountantis 40 years old with an anticipated retirement age of 70 years old. The accountant plans to

save $6,000 per year at the end of the next 30 years to fund retirement.

$336,510

An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The

last cash flow is received 1 year prior to the end ofthe tenth year.

What is the investor's future balance after 10 years?

$24,973

What is the par value (face value) of a bond?

The sum of money that the corporation promises to pay upon expiration of the bond.

A broker is considering purchasing common stock in a company that has average but consistent operating

performance.

Which factor should lead the broker to purchase shares in this company?

The current price of the stock is 25% below its intrinsic value.

A broker is considering buying a dividend-paying stock. The dividend will be paid atthe end of the year.

The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual

dividend (ex dividend date is not a consideration,the broker will receive the full $2.25), and the broker

expects a 12% rate of return

What is the highest price the broker should be willing to pay for the stock?

$34.15

A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to

grow by 10% per year.

What is the expected return per year?

14.9%

Which investment option is less desirable for a prudent investor?

Quadrant 4, bottom left, 3/4 to right side. Also E. for answer.

The market rate of return is 9%. The face value ofthe bond is $1000,the coupon rate is 9% with annual

compounding, and the bond matures in 10 years.

What is the value of the bond?

$1,000

Which statement is true about fluctuations in bond prices?

When the market interest rates fluctuate, the required rate of return equals the bond coupon rate.

A company issues bonds at a market price of $925. The face value is $1,000. The bonds mature in 10 years,

and the coupon rate is 6% compounded semiannually.

What is the yield to maturity (YTM) on the company's bonds?

7.06%

Which securities are issued by local governments and are usually tax exempt at the federal level?

Municipal bonds

A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090.

What is the yield to maturity for this bond?

4.28%

A bond that matures in 30 months is sold at a premium.

What is the yield to maturity (YTM)?

Lower than the coupon rate

Why does a long-term bond resemble an interest-only loan?

None of the principle is repaid until the bond matures.

Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate

(APR)?

Any time the number of compounding periods is greater than annual.

What is the difference between a common stock and a preferred stock?

Skipping a declared preferred stock dividend results in dividends in arrears.

Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?

Risk decreases at a slower rate.

Where along this line will a highly risk-averse investor likely fall?

C1 - Three up vertical on the graph curve and also that would be on the most arched part of the graph.

What are two primary benefits of the capital asset pricing model (CAPM)?

CAPM provides a way to determine the expected return for stocks. & CAPM provides a way to estimate the required return.

A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred

equity 8%, and a marginaltax rate of 34%. The current market value ofthe company is $150 million, with

$75 million common equity, $50 million debt, and $25 million preferred equity.

What is the company's weighted average cost of capital?

9.7%

Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available?

Increase sales prices and Alter capacity

Partial financial data for a company is as follows:

Assets: $10,000,000

Liabilities: $4,000,000

Equity: $6,000,000

Sales: $25,000,000

Netincome: $5,000,000

Profit margin: 20%

Dividends: $500,000

Dividend payout ratio: 10%

ROA: 50%

ROE: 83%

What is the sustainable growth rate for the company?

75%

A machine will reach the end of its useful life in Year 5. The realizable salvage value is expected to be

$50,000 with a book value of zero. The company's marginaltax rate is 34%.

What is the tax implication on the sale of the new machine at Year 5?

Tax liabilities of $17,000

What is the acceptance criteria when using internal rate of return to evaluate a project?

Accept when the project return is greater than the required return.

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years.

How much should the company investtoday, assuming an average inflation rate of 2% and a 10% annual

return?

$24,393

A company has a market value of $500 million.

It has a market value of equity of $200 million, a market value of long-term debt of $150 million, and a

market value of short-term debt of $150 million.

The cost of equity is 12%,the cost of long-term debtis 8%, and the cost of short-term debtis 6%. The

marginal tax rate is 35%.

What is the weighted average pre-tax cost of capital (WACC) for this company?

9.00%

What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?

CAPM considers risk of a stock relative to the market to determine expected

return.

Why do companies strive for a lower cost of capital?

Less money dedicated to financing means more money is available for production and operations.

A corporation established its projected sales at $210 million. Itis using its current year balance sheet as a

basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts

receivable will be 19% of projected sales, and PP&E will be 55% of projected sales. Accounts payable are

estimated to be 12% of projected sales. Owners' equity is $34 million. Long-term debtis $90 million.

Additionally,the firm raised $12.9 million of equity capital.

What is the amount of discretionary financing needed?

$8 million

Year 2010 ending retained earnings were $2,000,000. Year 2011 forecasted sales are $100,000 with a

25% net margin and 20% dividend payout ratio.

What are the forecasted retained earnings for Year 2011?

$2,020,000

How is the amount of discretionary financing that is needed by a firm determined?

Projected total assets − projected total liabilities + projected owner's equity

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Which three pieces of data are needed to perform a capital budget analysis?

Annual cash flows for the life of the new project., Cash flow when the firm terminates the project., & The initial cost of the new project.

What are two examples of sunk costs?

The cost of a market study conducted prior to the decision and The cost of feasibility consulting incurred before the decision point.

Company A has a degree of operating leverage of 1.85 and Company B has a degree of operating leverage

of 6.5.

What does the degree of operating leverage say about the two companies?

Company A has lower risk than Company B.

Which action is an important part of managing accounts receivable?

Setting credit terms.

What is the main benefit associated with holding inventory?

It makes it possible to meet the demands of customers.

A person needs to determine the costto replace a company's property, plant, and equipment using the

replacement cost method.

Which value does this person need to consider in order to make this determination?

Market value

Which type of investment will a risk-averse investor most likely invest in?

Index funds

Company Y has a greater degree of financial risk than Company Z.

What will happen if there is a 1% decrease in EBIT for both companies?

It will result in a greater percentage decrease in Company Y's pre-tax profit.

How does the anticipation of bankruptcy affect a firm's capital structure?

A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs.

Why would a company prefer to raise capital by issuing debt instead of issuing new equity?

Debt financing provides interest tax benefits.

Which hybrid security has special claims on a corporation's profits or, in case of liquidation, corporate assets?

Preferred stock

How will an increase in corporate tax rates affect a firm's cost of capital?

The cost of debt will decrease.

Which financial ratio is used to measure a company's effectiveness in extending credit as well as collecting

debts?

Accounts receivable turnover

What is the reason for holding cash and cash equivalents?

To provide liquidity

Which term describes the amount of cash a firm needs in order to pay its immediate bills?

Operating balance

How does the Securities Exchange Commission (SEC) regulate the financial industry?

By requiring public disclosure of information about entities that sell public equity or debt.

Which company control is required by the Sarbanes-Oxley Act?

Disclosure of off-balance sheet debts.

Which document is required to be made available prior to a firm going public, according to the Securities Act of 1933?

Prospectus

What does the Financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and Securities and Exchange Commission (SEC)?

Sales practices

What did the Dodd-Frank Act seek to prevent?

Financial institutions becoming too big to fail.