WGU C214 - Financial Management - C214 Exam 2024

WGU - Financial Management - C214 A bond is similar to a loan (T or F) - ✔True A bond is a debt instrument issued by corporations or governments. - ✔True A syndicate is a group of investors that is temporarily formed to handle the issuance of new bonds. - ✔True If the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread. - ✔Increase the spread A stock is a share of ______________ in a particular company. - ✔Ownership The New York Stock Exchange is an auction market. - ✔True Some high frequency traders provide liquidity to the rest of the market. - ✔True If providing liquidity becomes more risky, then dealers will __________ the spread. ✔Increase the spread Without financial markets, exchange would become more costly. - ✔True NYSE daily trading volume has increased over the last 50 years. - ✔True Which type of bond placement - competitive sale or negotiated sale - requires a more thorough interview process? - ✔negotiated sale Secondary markets are where securities are initially offered to the public. - ✔False An IPO is where a company goes public or sells shares to the public for the first time. ✔True Trading on the NYSE is executed without a specialist (i.e., a market maker). - ✔False Stocks and bonds are two types of financial instruments. - ✔True The matching principle in accrual accounting requires that_________. - ✔revenues be recognized when the earnings process is complete and matches expenses to revenues recognized

A high-quality customer just purchased $500,000 worth of product from your company.

The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid in 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under an accrual based accounting system, you will most likely report which of these? ✔Revenues of 300,000 and expenses of 200,000 Accounts payable represents money a firm owes to: - ✔Suppliers due to purchases made on credit The basic balance sheet equation states that Assets are equal to Liabilities plus Owner's equity. This is because all assets are: - ✔Financed either by other people's money or by the firm's owners' money.

(True/False) If you want to understand a firm's operations, cash accounting is a superior tool. - ✔False The matching principle in accrual accounting requires that: - ✔Revenues are matched to the expenses incurred to generate the revenues Which of the following would not be considered an operating expense? - ✔Interest Expense The evolution of retained earnings is best described by: - ✔Change in retained earnings = net income - dividends Net Fixed Assets represents: - ✔The original cost of the firm's assets held for use less accumulated depreciation A firm can use retained earnings to pay bills if needed. - ✔False (True/False) The income statement represents a snapshot of the firm at one point in time. - ✔False Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period. - ✔False Accrual accounting recognizes: - ✔Revenues when the earnings process is complete and matches expenses to revenues recognized.

(True/False) An income statement always provides an accurate measure of a firm's cash flows. - ✔False

Retained earnings represents: - ✔The cumulative amount of the firm's earnings not distributed to shareholders Notes Payable carry an explicit interest cost - ✔True Current assets are listed in order of: - ✔Most liquid to the least liquid. (Cash, marketable securities, accounts receivables, inventory) When a firm purchases short-term U.S. Treasury securities, they are generally included on the balance sheet as: - ✔Marketable Securities Earnings Before Interests and Taxes (EBIT) is also called: - ✔Operating Income The use of the historical cost principle on the balance sheet means: - ✔That most assets are stated at the original cost less depreciation Why is the balance sheet known as a permanent statement? - ✔The other statements are reset at the end of the fiscal year.

How do you calculate the change in retained earnings? - ✔Net income - Dividends Which of the following is generally true?

Gross profit and operating income are the same Operating income and EBIT are the same EBIT + Income taxes = Net income Cost of goods sold + Operating expenses = Net income - ✔Operating income and EBIT are the same Which components are part of total assets? - ✔Cash accounts receivable, inventory, long term assets Which components are part of current assets? - ✔Inventory, cash, accounts receivable, short term investments Which components are part of total liabilities? - ✔Bonds, accounts payable, mortgage The sum of CFO + CFI + CFF is equal to: - ✔The change in cash during the period Which of the following is true with respect to CFO? An increase in inventory indicates a reduction in CFO An increase in accounts payable indicates a reduction in CFO An increase in cash indicates a reduction in CFO

A decrease in notes payable indicates a reduction in CFO - ✔An increase in inventory indicates a reduction in CFO Free Cash Flow (FCF) is different from Cash Flows from Operations (CFO) because FCF: - ✔Represents cash flow after required investment (True/False) The Statement of Cash Flows is not useful when assessing the financial health of a firm due to the impact of accrual accounting. - ✔False Which of the following will decrease CFO? An increase in accounts receivable and a decrease in accounts payable An increase in inventory and a decrease in notes payable A decrease in inventory and an increase in accounts payable An increase in inventory and an increase in accounts payable - ✔An increase in accounts receivable and a decrease in accounts payable Depreciation expense is a significant source of difference between net income and CFO because: - ✔Depreciation expense is non-cash expense on the income statement associated with the acquisition of long-lived assets.

For visualization purposes, it is correct to think of balance sheet accounts relevant to CFI as being on the bottom of the financing side. - ✔False Increases in operating assets and decreases in operating liabilities will decrease CFO. ✔True (True/False) Assuming no asset disposals, CFI is equal to the change in Net PP&E. ✔False (True/False) A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets. - ✔False Increases in operating balance sheet accounts will decrease CFO. - ✔False When calculating CFO, which of the following is correct?

Subtract an increase in accounts payable Subtract depreciation expense Add an increase in cash Add an increase in accrued wages - ✔Add an increase in accrued wages Which one of the following items should NOT be included in the calculation of CFF? Change in Common Stock Change in Long-term Debt

Dividends paid during the fiscal year Change in Retained Earnings - ✔Change in Retained Earnings (True/False) When calculating CFO, you generally include the changes in all current assets and current liabilities. - ✔False Assuming no asset disposals, depreciation expense is equal to: - ✔The change in accumulated depreciation FCFF can sustainably be distributed to the providers of capital. - ✔True (True/False) The calculation of FCFF uses NOPAT instead of Net Income because FCFF is the cash available to both debt holders and equity holders. - ✔True Which is the purpose of the statement of cash flows? - ✔It explains the change in cash balance for one period of time.

Which one of the following is NOT an example of meaningful ratio analysis?

Using ratios to compare a firm with high performing competitors.

Using GAAP rules to calculate standard ratios.

Using ratios to assess goal achievement.

Analyzing the trend in ratios over time for a single firm. - ✔Using GAAP rules to calculate standard ratios.

The flexibility aspect of ratios and ratio analysis refers to which of the following?

Ratios determine the financial flexibility of a company.

Analysts can create new ratios if needed.

Ratios can be used to compare a firm to the industry's top performers.

Firms of different size can be compared on the same scale. - ✔Analysts can create new ratios if needed.

What ratios are apart of the common ratio categories? - ✔Liquidity, Asset Use Efficiency, Financing (Leverage), and Profitability.

Ratios help identify the areas of a firm that need investigation. - ✔True GAAP accounting standards allow for significant managerial discretion in reported financial statements. - ✔True In order to make ratio analysis a more effective tool, you should carefully consider: ✔Demographic trends.

Bubbles and recessions.

Technological changes.

When performing ratio analysis, scrubbing the data includes all of the following except: Identifying accounting differences among competitors.

Choosing a relevant comparison set.

Alignment of ratios for companies with different fiscal year-ends. - ✔Choosing a relevant comparison set.

Which one of the following is not an element of the DuPont decomposition?

Portion of assets financed by equity.

Sales as a percentage of total assets.

Percentage of net income paid out as dividends.

Earnings as a percentage of sales. - ✔Percentage of net income paid out as dividends.

The process of making a target firm's data comparable to a peer group is known as scrubbing the data. - ✔True If the current ratio of a company is higher than the industry, then: - ✔You cannot tell without looking at other liquidity ratios.

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 OIROI (operating income return on investment) uses what elements on the income statement? - ✔EBIT, total assets Why would a company be interested in the TAT (total asset turnover) ratio? - ✔It indicates how efficient assets are at producing sales.

Which one of the following is NOT a characteristic of ordinary annuities?

Payments are equally spaced.

Payments are made at the beginning of each period.

Payments are of equal amounts.

All are characteristics of ordinary annuities. - ✔Payments are made at the beginning of each period.

Which one of the following is NOT a characteristic of annuities due?

Payments are of equal amounts.

Payments are made at the beginning of each period.

All are characteristics of annuities due.

Payments are equally space - ✔All are characteristics of annuities due.

Perpetuities are different from ordinary annuities in that perpetuities: - ✔Pay an infinite number of payments.

What type of bond is tax exempt? - ✔Muni-bond Why are bonds the primary method for raising capital? - ✔They avoid the costs of the intermediary The amount repaid at the expiration date is called: - ✔Par Value Which of the following statements about a bond are true?i. A bond is a fixed-income security ii. The bond's interest payments vary each year with the market iii. Bonds allow firms to save on banker's overhead compared to bank loans - ✔i and iii What is the interest rate for annual payments of the bond known as? - ✔Coupon Rate What type of bond can be traded in for stock? - ✔Convertible Bond Which is the largest source of capital for firms? - ✔Bonds The date on which the face value of the bond is repaid is the: - ✔Expiration or maturity date What type of bond is paid in a different currency than the country's issuing it? - ✔Euro Bond You want to sell a bond for over $1,000. Can you do that if the coupon rate is 6.5% and the bond yield is 6.8%? - ✔No If the coupon rate is higher than the yield, the price will be above $1,000. If the coupon rate is lower than the yield (as in this case) the price will be below $1,000.

Some types of equity give the owner the right to vote on company matters. - ✔True If we do an analysis and determine a company is really good, this means it is also a good investment. - ✔False Preferred stock is reserved for established companies like utilities and is not used for new start-up ventures. - ✔False The control issues involved in running a firm are known as: - ✔Corporate governance Unlike bonds which are fixed-return securities, stocks are ___________________ securities. - ✔Variable return Which of the following is a typical characteristic of preferred stock?

Dividends in arrears

Cumulative dividends A higher payoff claim in case of bankruptcy All of these choices - ✔All of these choices Like debt, stock has a maturity or expiration date. - ✔False Preferred stock is often called a _______ security because it has some characteristics of debt and some of equity. - ✔Hybrid In a CAPM framework, why do investors hold the market portfolio - ✔Any stock with higher expected returns, relative to risk, will converge to the market portfolio T or F - As the market risk premium increases, the CAPM suggests that expected returns for individual stocks will increase as well. - ✔True If a firm has more idiosyncratic risk, then, according to the CAPM, the return required by shareholders will be higher. - ✔False 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 Accounts that vary directly with sales are called: - ✔Spontaneous accounts Generally speaking, as a firm grows its sales what is required? - ✔Increased financing is needed to fund the growth.

If DFN is negative, what does it indicate? - ✔We have extra funds in the forecasted period.

Which of the following is usually NOT a spontaneous account?

Current assets Accounts payable Accruals Long-term debt - ✔Long-term debt Firms should grow their sales as fast as possible. - ✔False What is typically covered by discretionary accounts? - ✔DFN When using the percent of sales method, accounts like accounts receivable always have to vary with sales. - ✔False

Forecasting is vulnerable to the inputs that we put into the model. What is the acronym for this concern? - ✔GIGO Which of the following is NOT one of the four factors of growth according to the DuPont and SGR? Leverage Dividend policy Profitability All of these are growth factors Asset utilization - ✔All of these are growth factors What is Dividends/Net Income called? - ✔dividend payout ratio The amount of product or service a firm can produce with its given fixed assets is known as: - ✔Capacity What are pro forma statements? - ✔Forecasted financial statements.

When we talk about discretionary accounts, who's discretion is being exercised? ✔Management How do we compute future levels of spontaneous accounts? - ✔Multiply projected level of sales by historical percent of sales.

Growth typically requires increased ________ in the firm (for forecasting purposes). ✔Investment Sometimes we multiply "net margin" times projected sales to get forecasted net income.

What is the ratio for net margin? - ✔NI/S What are non-spontaneous (discretionary) accounts? - ✔Notes Payable, Long-term financing, common stock How does the Dodd Frank Act monitor capital markets? - ✔Monitors the insurance industry Systematic risk analysis Regulates types of assets banks can hold Monitor hedge fund industry Which act uses CAMELs scores? - ✔The Federal Institutions Reform, Recovery, and Enforcement Act of 1991 Which of the following is NOT part of the Sarbanes-Oxley Act:

Holds top management responsible for accurate accounting reports Assigns new responsibilities to board members Requires external audits of financial statements Disciplines accounting firms for oversight of compliance issues Assigns specific accounting firms to audit a firm based on its industry - ✔Assigns specific accounting firms to audit a firm based on its industry Who is NOT subject to FINRA regulation?

Corporations that trade in equity, bond or futures markets that are not regulated by another self-regulatory organization Brokerage firms Exchange markets All of these choices are subject to FINRA regulation None of these choices are subject to FINRA regulation - ✔All of these choices are subject to FINRA regulation What is FINRA's primary purpose? - ✔Ensure the securities industry is fair and honest All firms that wish to make an initial public offering of equity or debt for non-accredited investors must first file public disclosure data with the SEC. - ✔True A prospectus contains all of the following - ✔The name(s) of underwriter facilitating the offering Detailed information about the securities offered Audited financial statements Price and number of shares offering will include The "Wildcat Banking" era lead the government to regulate the banking industry in the US. Which of the following acts was instituted in an effort to help prevent bank runs: ✔National Banking Act of 1863 Some analysts argue that the expense of SOX in both time and money has caused the number of public firms in the US to decrease. - ✔True Which of the following committees was created as a direct result of the Dodd Frank Act? - ✔Financial Stability Oversight Council A prospectus is separate from the SEC filing. - ✔False What is the primary objective of the SEC? - ✔To protect investors by ensuring public firms provide adequate information Which of the following acts limited types of products a consumer bank could offer or hold, creating a wall between commercial banks and investment banks? - ✔GlassSteagall Banking Act of 1933

Which of the following Acts loosened the regulation on types of products financial institutions could offer? - ✔Garn-St. Germain Act of 1982 The final price and number of shares can be changed as late as the morning of the offering. - ✔True The Dodd Frank Act loosens regulations for banks. - ✔False FINRA is a division of the federal government - ✔False What does a "safe harbor" to the 1933 Act provide? - ✔Allows firms to sell private equity without registration with the SEC Restricts sale of shares to accredited investors only Defines accredited investors as those with a net worth greater than $1 million Defines accredited investors as those with an annual income of $200K/year or a combined annual income of $300k/year What are a provisions of SOX? - ✔No retaliation against whistleblowers Approved/proper audits Disclosure of off-balance sheet items Information transparency Dodd-Frank regulates which segment of the U.S. economy? - ✔Banking The Securities and Exchange Commission (SEC) requires companies to do the following: - ✔Register all public offerings.; Regulate stock sales What does the Sarbanes-Oxley Act require companies to do? - ✔Have internal control audits.

Financial Industry Regulatory Authority (FINRA) does the following: - ✔Prosecutes corrupt stock brokers Why would a country have incentives to devalue its currency? A weaker currency ______________. - ✔makes exports relatively cheaper for foreign consumers. makes imports relatively more expensive for domestic consumers. in general a weaker currency can help a domestic economy.

If a currency (Swiss Franc) appreciates relative to a second currency (Chinese Yuan), then the exchange rate measured as SF/Yuan goes: - ✔Down If Ford manufactures a vehicle in the US paying dollars and sells it in Mexico collecting pesos, if the price in Mexico for the vehicle stays constant, but the value of the Peso

depreciates against the dollar, then Ford will make ____________ profit measured in US dollars. - ✔Less What is a common abbreviation for foreign exchange risk? - ✔FX Risk What are the types of exchange rate regime discussed in this section? - ✔floating fixed managed floating If a country follows a floating exchange rate policy then the value of the currency is determined strictly by: - ✔supply and demand in the open market If a country intervenes to maintain a constant value of the country's currency, it is a ___________ exchange rate regime. - ✔fixed and pegged The policy that allows a currency to float within a minimum and a maximum is called: ✔managed floating When Chile pegged the Chilean Peso to the US dollar in the 1970s it was a great help to their national economy. - ✔False A country's monetary authority intervenes to maintain a constant value of the country's currency - ✔Fixed or Pegged Value of the currency is determined by supply and demand - ✔Floating Not controlled entirely by market demand and supply, but is partially controlled by government intervention that limits minimum and maximum value - ✔Managed Which are two primary methods used the mitigate FX risk? - ✔Financial derivatives; Direct investment The goal of using a financial derivate such as a forward or future is to? - ✔make no profits through exchange rate movements What type of derivative security discussed in this section allows companies to lock in an FX rate for the future? - ✔Currency Forward & Currency Future The general process of eliminating risk with FX is referred to as: - ✔Hedging In finance jargon, what is another word that means to buy an asset? - ✔Long True/False: The idea of comparative economic advantage provides support for the benefits of global free trade? - ✔True

Two examples of US legislation to promote global free trade are: - ✔NAFTA; TPP What is the primary motive for tariffs? - ✔to protect domestic industries What is discussed as a potential cost of doing international business. - ✔taxes tariffs currency restrictions The purpose of currency restrictions is: - ✔to limit the ability of a foreign firm to take capital out of a country True/False: Corporate tax rates are the same in every country because of international trade agreements. - ✔False True or False: The only way to raise foreign capital is through the debt markets? ✔False Global Bonds - ✔Yankee bond Bulldog bond Eurobond Samurai bond True or False: For a bond to be classified as a Eurobond, it must be a US bond denominated in US dollars and issued in Europe? - ✔True Outsourcing involves the ______ market. - ✔Labor A financial product in which banks bundle international stocks so they can be sold on US exchanges in US dollars is termed a __________. - ✔ADR Government funds designed to invest abroad are termed: - ✔Sovereign wealth funds If a product is made 100% domestically, what can affect its domestic market? ✔International competition If a company makes its product in a foreign country where labor costs are much lower, what happens? - ✔Profits go up and domestic employment decreases.

If the value of the dollar increases, the price of imports_______. - ✔Decreases Why would a farmer buy a hedge when he signs a contract to sell produce overseas? ✔To reduce currency risk

True or False: Country risk and political risk are the same thing? - ✔False What are the likeliest outcomes if a company outsources the manufacturing of its products to a foreign country? - ✔Consumer prices will decrease.

Domestic employment will decrease.

How can a private firm appropriately maximize shareholder value? - ✔By making decisions that keep the control of the business with the owners 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.

Selected Data for 20x2 for ABD Inc.Net Income$ 1,000Depreciation Expense$ 300Change in Operating Assets$ 600Change in Net Property, Plant, and Equipment$ 5,000Changes in Long-Term Liabilities$ 1,000Dividends Paid$ 200 What is this firm's cash flow from investments, using the data above and assuming no asset disposals? - ✔$5,300 outflow 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 What do the content and structure of a balance sheet report? - ✔The assets, liabilities, and equity at a point in time 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.

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

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 Which statement is true about fluctuations in bond prices? - ✔When market interest rates fluctuate, the bond coupon rate is unchanged.

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 principal 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.

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.

Which two techniques are effective ways to manage the growth of a firm, if additional financing is not available?Choose 2 answers. - ✔Increasing sales prices Altering capacity How is the amount of discretionary financing that is needed by a firm determined? ✔Projected total assets − projected total liabilities − projected owner's equity 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 Which three pieces of data are needed to perform a capital budget analysis? - ✔The initial cost of the new project Cash flow when the firm terminates the project Annual cash flows for the life of the new project What are two examples of sunk costs? - ✔The cost of a market study conducted prior to the decision The cost of feasibility consulting incurred before the decision point

Which 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.

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 these two companies? - ✔Company A has lower risk than Company B. Company Y has a greater degree of financial risk than Company Z.What would be a result of a 1% decrease in EBIT for both companies? - ✔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 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.

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 A person needs to determine the cost to 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 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 offbalance 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 the SEC? - ✔Sales practices What did the Dodd-Frank Act seek to prevent? - ✔Financial institutions becoming too big to fail