WGU C214 Concepts Only Multi Choice Version

Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F)

False

Stocks and bonds are two types of financial instruments (T/F)

True

The matching principle in accrual accounting requires that:

a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized.

b. Expenses are matched to the year in which they are incurred

c. Revenues are matched to the year in which they are booked

d. Revenues should be large enough to match expenses

Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized.

A basic equation for the balance sheet is:

a. Equity = Assets - Liabilities

b. Liabilities = Equity + Assets

c. Assets = Liabilities - Equity

d. Assets = Equity - Liabilities

Equity = Assets - Liabilities

Why is the Balance Sheet known as a permanent statement?

a. Because the statement is sent to the SEC.

b. Because the other statements are reset at the end of the fiscal year

c. Because it is printed out and archived

d. Because it persists in the minds of the shareholders.

Because the other statements are reset at the end of the fiscal year

How do you calculate the change in Retained Earnings?

a. Ending Retained Earnings - Change in Cash

b. EBIT divided by Total Assets + Dividends

c. EBIT - Change in Cash - Dividends

d. Net Income - Dividends

Net Income - Dividends

Which of the following is generally true?

a. Gross Profit and Operating Income are the same

b. Cost of Goods Sold + Operating Expenses = Net Income

c. Operating Income and EBIT are the same

d. EBIT + Income Taxes = Net income

Operating Income and EBIT are the same

Which components are part of total assets?

a. Cash, Accounts Receivable, Short Term Debt

b. Cash Accounts Receivable, Inventory, Long Term Assets

c. Accounts Payable, Long Term Assets, Long Term Debt

d. Accounts Payable, Net Income, Equity

Cash, Accounts Receivable, Inventory, Long Term Assets

Which components are part of current assets?

a. Cash, Accounts Receivable, Property Plant & Equipment

b. Accounts Receivable, Accounts Payable, Inventory

c. Long Term Debt, Property Plant & Equipment, Common Stock

d. Inventory, Cash, Accounts Receivable, Short Term Investments

Inventory, Cash, Accounts Receivable, Short Term Investments

Which components are part of Total Liabilities?

a. Accounts Payable, Accounts Receivable, Short Term Debt

b. Long Term Debt, Common Stock, Retained Earnings

c. Bonds, Accounts Payable, Mortgage

d. Common Stock, Long Term Debt, Short Term Investments

Bonds, Accounts Payable, Mortgage

When Fixed Assets increase what happens to Cash?

a. Cash stays the same

b. Cash increases

c. Cash decreases

d. Assets decrease

Cash decreases

Which is the purpose of the statement of cash flows?

a. serves as the replacement for the income statement and balance sheet

b. explains the change in cash balance at one point in time

c. explains the change in cash balance for one period of time

d. both (a) and (b) above

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?

a. Operating Income, EBIT, Total Liabilities

b. EBIT, Total Assets

c. Sales, Total Assets, Equity

d. Net Margin, Total Current Assets

EBIT, Total Assets

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

a. How efficient assets are at producing income

b. What the turnover of sales is to liabilities

c. How efficient assets are at producing sales

d. How efficient assets are to liabilities and equity

How efficient assets are at producing sales

Which of the following gives the largest effective rate (APY)

a. 18.6% compounded monthly

b. 18.6% compounded daily

c. 18.6% compounded weekly

d. 18.6% compounded yearly

18.6% compounded daily

What does the beta coefficient represent?

a. It is a statistically-derived measure of volatility

b. It is the Expected Return minus the Growth Rate

c. It is the volatility of the Risk Free Return

d. It is the expected return for a basket of preferred stocks

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?

a. Because fixed assets should remain on the balance sheet

b. Because depreciation is not a current asset

c. Because depreciation is a non-cash liability

d. Because depreciation expense is tax deductible

Because depreciation expense is tax deductible

Why is the NPV preferred over the IRR? Pick Two

a. It has a higher dollar value

b. It measures the dollar value

c. It is more reliable

d. It is harder to calculate

It is more reliable

It is harder to calculate

What does the Degree of Financial Leverage indicate?

a. The firms cash balance

b. The cost of financed assets

c. The reliance on debt

d. The reliance on assets

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?

a. Low Risk

b. Appropriate Risk

c. Higher ability to pay debt

d. Higher profits to shareholders

Higher profits to shareholders

What is the cash cycle?

a. The speed of collecting cash from customers

b. The amount of cash kept in banks

c. The comparison of debt to cash

d.The amount of time to regenerate cash

The amount of time to regenerate cash

Why is float important to understand?

a. To know how to keep the company profitable

b. To know why the company needs cash

c. To determine when to buy fixed assets

d. To time cash expenditures

e. None of the above

To time cash expenditures

What should a company do to manage its working capital?

a. Collect quickly and pay slowly

b. Keep a large cash balance

c. Maximize the use of long term investment

d. Depreciate assets more slowly

Collect quickly and pay slowly

What would be a source of information to determine Replacement Cost?

a. Building Appraisal

b. Accumulated Depreciation Expense

c. Stock price

d. Statement of Cash Flows

Building Appraisal

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

a. Have a board of directors

b. Register all foreign sales

c. Make estimated tax payments

d. Have internal control audits

Have internal control audits

FINRA (Financial Industry Regulatory Authority) does the following: (pick one)

a. No foreign bribery by corporations

b. Regulates bond prices

c. Establishes Credit Unions

d. Prosecutes naughty stock brokers

e. Regulates Hedge Funds

Prosecutes naughty stock brokers

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

a. International exchange rates

b. International competition

c. Product tariffs

d. International political regulations

International competition

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

a. Profits and domestic employment goes up

b. Costs go up and domestic employment goes down

c. Costs stay the same and domestic employment increases

d. Profits go up and domestic employment decreases.

Profits go up and domestic employment decreases.

If the value of a dollar increases, the price of imports:

a. Increases

b. Decreases

c. Stays the same

d. Fluctuates

Decreases

Why would a farmer buy a hedge when he signs a contract to sell produce overseas?

a. To avoid tariffs

b. To reduce currency risk

c. To increase profits

d. To avoid competition

To reduce currency risk

A basic equation for the balance sheet is:

a. Equity = Assets - Liabilities

b. Liabilities = Equity + Assets

c. Assets = Liabilities - Equity

d. Assets = Equity - Liabilities

Equity = Assets - Liabilities

Why is the Balance Sheet known as a permanent statement?

a. Because the statement is sent to the SEC.

b. Because the other statements are reset at the end of the fiscal year

c. Because it is printed out and archived

d. Because it persists in the minds of the shareholders.

Because the other statements are reset at the end of the fiscal year

How do you calculate the change in Retained Earnings?

a. Ending Retained Earnings - Change in Cash

b. EBIT divided by Total Assets + Dividends

c. EBIT - Change in Cash - Dividends

d. Net Income - Dividends

Net Income - Dividends

Which of the following is generally true?

a. Gross Profit and Operating Income are the same

b. Cost of Goods Sold + Operating Expenses = Net Income

c. Operating Income and EBIT are the same

d. EBIT + Income Taxes = Net income

Operating Income and EBIT are the same

Which components are part of total assets?

a. Cash, Accounts Receivable, Short Term Debt

b. Cash, Accounts Receivable, Inventory, Long Term Assets

c. Accounts Payable, Long Term Assets, Long Term Debt

d. Accounts Payable, Net Income, Equity

Cash, Accounts Receivable, Inventory, Long Term Assets

Which components are part of current assets?

a. Cash, Accounts Receivable, Property Plant & Equipment

b. Accounts Receivable, Accounts Payable, Inventory

c. Long Term Debt, Property Plant & Equipment, Common Stock

d. Inventory, Cash, Accounts Receivable, Short Term Investments

Inventory, Cash, Accounts Receivable, Short Term Investments

Suppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely?

a. The firm has lower liquidity than the industry average.

b. The firm has too much inventory thus impairing overall liquidity.

c. The firm has too little inventory resulting in lost sales or stock-outs.

d. The firm has low sales volume.

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?

a. higher

b. lower

c. the same

d. it doesn't matter

higher

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

a. Profit Margin percentage

b. Beta Coefficient

c. Operating Leverage

d. Free Cash Flow

Beta Coefficient

Why would we reject a project based on the NPV?

a. The NPV is lower than the IRR

b. The NPV is lower than investment

c. The NPV is a negative number

d. The IRR is positive.

The NPV is a negative number

Why would we reject a project based on the IRR?

a. The IRR is higher than the sum of the cash flows

b. The discount rate is lower than the IRR

c. The IRR is higher than the NPV

d. The discount rate is higher than the IRR

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?

a. Company A is less liquid than Company B

b. Company B invests in more working current assets

c. Company A uses better working capital management

d. Company B has a more conservative cash policy

Company B invests in more 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?

a. Company B has a looser credit policy

b. Company A keeps more of its Accounts Receivable

c. Company A can attract more customers

d. Company B can attract more customer

Company A can attract more customers

Which of the following characterizes collection float

a. Longer float indicates good financial practices

b. Increased float indicates slower processing time

c. Accounts receivable increase with shorter float

d. Liquidity is enhanced with longer 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?

a. Company B has lower inventory float

b. Company A has more cash in hand

c. Company B might have higher inventory turnover

d. Company A has tighter credit.

Company B might have higher inventory turnover

In regards to Accounts Payable balances, which of the following is true:

a. Higher Accounts Payable is better than a lower balance

b. Paying off A/P as soon as possible is good policy

c. Increased Accounts Payable means faster collections

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

Paying off A/P on the last day due is 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?

a. The value is the same

b. The value of Company X is higher

c. The value of Company Z is higher

d. The relative value can't be determined

The value of Company Z is higher

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

a. Fannie Mae and Freddie Mac (Housing financing)

b. Banking Industry

c. Multi-level Marketing Industry

d. Automobile Industry

Banking Industry

The SEC Securities & Exchange Commission requires companies to do the following: (pick two)

a. Register all public offerings

b. Change CEOs on a regular basis

c. Regulates stock sales

d. Prohibits foreign bribery

e. Regulates the Money Supply

Register all public offerings

Regulates stock sales

Economics is a subfield of Finance (T/F)

False

Capital is defined as a financial asset. (T/F)

True

Stocks and bonds are two types of financial instruments (T/F)

True

Primary financial markets are markets where issuers place new securities with investors. (T/F)

True

An IPO occurs on the primary market (T/F)

True

An IPO is a seasoned equity offering (T/F)

False

Syndicates are generally made up of investment banks and other institutional investors (T/F)

True

While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not. (T/F)

False

NASDAQ is the world's largest secondary financial market. (T/F)

False

Auction markets have a physical location. (T/F)

True

Dealer markets have a physical location.

False

Nasdaq is an example of an auction market.

False

Stocks that are listed on dealer markets generally have a single dealer for each stock.

False

Markets are where prices are determined (T/F)

True

The NYSE specialist has an objective to provide liquidity to the market. (T/F)

True

The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock

False

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 at the current ask price (T/F)

False

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

Efficient markets are those in which prices are volatile

False

Efficient markets will often have mispriced securities

False

Inefficient markets are those in which prices will respond quickly to new information

False

Inefficient markets will often have mispriced securities.

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

True

In an inefficient market, prices will slowly respond to new information.

True

In an efficient market, new information will move prices almost immediately (T/F)

True

What is the relationship between WACC and IRR?

a. Just 2 different numbers

b. IRR must exceed WACC to accept investment

c. WACC must exceed IRR to accept investment

d. WACC and IRR are the same thing

IRR must exceed WACC to accept investment

What is the relationship between NPV and IRR?

a. Both must exceed WACC to accept investment

b. If discount rate equals IRR, NPV is equal to zero.

c. NPV must exceed WACC to accept investment

d. If discount rate equals IRR, should accept investment

If discount rate equals IRR, NPV is equal to zero.

If a firm's financial and operating leverage is high, what is the implication?

a. The firm is more profitable

b. Profits are more volatile as sales fluctuate

c. The firm is less profitable

d. The two leverages offset each other - - neutral impact

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?

a. Use high financial leverage to offset high fixed costs

b. Use low financial leverage to offset high operating leverage

c. It has no implication at all

d. None of the above

Use low financial leverage to offset high operating leverage

The SGR measures:

a. Historical dividend growth rate

b. Sales growth rate

c. Potential sales growth with internal funding

d. None of the above

Potential sales growth with internal funding

The SEC Securities & Exchange Commission requires public companies to do the following:

a. File audited financial statements with SEC

b. Change CEOs on a regular basis

e. Regulates the Money Supply

d. Prohibits foreign bribery

File audited financial statements with SEC

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

a. Have a board of directors

b. Register all foreign sales

c. Make estimated tax payments

d. Have internal control audits

Have internal control audits

If a company produces and sells a product only in the U.S., what international developments may affect its sales?

a. Fluctuating exchange rates

b. Imports of competing products

c. Immigration policy

d. Inflation in Europe

Imports of competing products

The SEC requires the following to file audited financial statements:

a. All companies

b. All for-profit companies

c. All publicly-traded corporations

d. There is no such requirement

All publicly-traded corporations

Which best describes conceptually the valuation of all financial assets in financial markets?

a. Based on opinions of Wall Street analysts

b. The NPV of anticipated cash flows

c. Based on the book value of assets and liabilities

d. None of the above

The NPV of anticipated cash flows

Which accurately describes an "efficient" market?

a. Prices are low

b. Prices do not fluctuate

c. Deviations from "fair value" are quickly eliminated

d. "Hot stocks" are the best investment

Deviations from "fair value" are quickly eliminated

If a firm's goal is to maximize stockholder wealth, which would the firm avoid?

a. Stock buybacks

b. Risky long-term investments

c. Investments with negative NPV

d. Transparency in financial statements

Investments with negative NPV

If you wanted to evaluate a non-public company, what sources would you use?

a. The financial statements filed with the SEC

b. The latest stock price quoted in the Wall Street Journal

c. The PE of a comparable public company

d. The book value of equity in its balance sheet

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?

a. Cash Flow Operations

b. Cash Flow Investing

c. Cash Flow Financing.

d. Cash Flow Securities

Cash Flow Operations

For calculating cash flows, why is depreciation added to Net Income?

a. To offset taxes

b. Depreciation is a non-cash deduction

c. To determine pre-tax income

d. None of the above

Depreciation is a non-cash deduction

The fundamental concept underlying the valuation of all financial assets is:

a. The application of the PE ratio

b. Use of the Gordon Model

c. The present value of anticipated cash flows.

d. The future value of cash flows

The present value of anticipated cash flows.

What explains the size of the yield spread of junk bonds over Treasury?

a. It is the value of the expected default loss

b. It depends the firm'a profit

c. It is the probability of default

d. It is a "psychological' reaction of investors.

It is the value of the expected default loss

What does Beta measure?

a. The default risk of a stock

b. The relative riskiness of an individual stock

c. Indicates the market value of the stock

d. Stocks to avoid purchasing

The relative riskiness of an individual stock

What is the most effective use of financial statements in valuing a stock?

a. Use the book value of equity on the balance sheet

b. Use GAAP earnnings

c. Use data to estimate future earnings

d. Read the footnotes

Use data to estimate future earnings

If market interest rates rise, what impact does it have on a given bond?

a. Its price decreases

b. It will have a discount price

c. No impact since the coupon rate is fixed

d. Its price increases

Its price decreases

What impact did the recent corporate tax cut have on a firm's WACC?

a. It decreased WACC

b. It increased WACC

c. No impact since WACC depend on firm risk

d. None of the above

It increased WACC

Why do firms often use "sensitivity" tests in analyzing investment projects

a. Required by the SEC

b. Uncertainty of forecast assumptions

c. Auditors require it.

d. Required section of financial statements

Uncertainty of forecast assumptions

If debt is less costly than equity, why don't firms maximize debt use?

a. Excessive debt inceases risk of banruptcy

b. Restricted by Federal tax regulations

c. It reduces the benfits of financial leverage

d. It increases operating leverage

Excessive debt increases risk of bankruptcy