WGU C214 OA Financial Management
Question and Answer | Updated Verified
Answers | Study Guide Pack
• Are actual taxes paid the same as how on the GAAP income statement? -✓✓No.
Actual Taxes = IRS Rules
Income Statement = GAAP
• Which decisions require using subjective estimates? -✓✓Economic life of a new asset.
• If there is a 30% change of a recession, what is the probability of expansion? -✓✓70%
*The sum of probabilities must equal 100%
• How much interest is paid on a 6% bond over 2 years and 3 months? -✓✓2 years and
3 months:
2 + (3/12) = 2 + (.25) = 2.25
6% x 1,000 = $60 per year
$60 x 2.25 = $135
• How does a "prudent investor" select investments? -✓✓Seeks the highest return for
"appropriate" amount of risk.
• What do points on the Efficient Frontier measure? -✓✓The maximum return for a given
level of risk; maximum Return-to-Risk ratio.
• What is "Beta?" -✓✓Measure of a stock's risk relative to the market.
• Why are accurate forecasts important? -✓✓Plan for resources for production; accurate
evaluation of capital projects.
• Which ratio is used in valuing a private company? -✓✓PE ratio in the "Comparable
Multiples" method.
• What are 3 costs associated with holding inventory? -✓✓1. Product
2. Storage
3. Opportunity
• What risk is eliminated by a diversified portfolio? -✓✓Idiosyncratic Risk - Risk affecting
a single firm.
, • What are the impacts of outsourcing? -✓✓Fewer U.S. jobs and lower priced products.
• What are the impacts of tariffs? -✓✓More U.S. jobs and higher product costs for
consumers.
• What securities are exempt from FEDERAL income taxation? -✓✓Municipal bond
interest is tax-exempt. Treasury securities ARE taxable.
• Why would a firm prefer to issue bonds rather than stock? -✓✓Debt has a lower
required return. Debt interest is tax deductible.
• What is the impact on the APY as the number of interest payments per year increase?
-✓✓APY increases
• What is the present value of future cash flows of a stock called? -✓✓Intrinsic Value -
The "real" value of the stock. PV of cash to investor.
• What indicates if a stock is a "good investment?" -✓✓The price of the stock is less
than the "intrinsic value."
• In the event of bankruptcy, what is the order of claims settlement? -✓✓1. Creditors
2. Subordinated Debt
3. Preferred Stock
4. Common Stock
• What is a spontaneous account? -✓✓One that changes with the level of sales --
Current Assets & Liabilities.
• What is a discretionary account? -✓✓One that changes due to management decision -
- Bonds Outstanding.
• If the financial ratios of 2 firms are compared, what is it called? -✓✓Cross-Sectional
Analysis
• If the debt ratio increases, what is the impact on Return on Equity (ROE)? -✓✓ROE
increases due to greater reliance on cheap debt financing.
• What financial structure causes profitability to be more volatile? -✓✓Leverage. Higher
leverage ratios mean more volatile profits.
• If debt is cheaper than equity, why not all debt? -✓✓Bankruptcy Risk -- Equity is the
cushion against bankruptcy.
Question and Answer | Updated Verified
Answers | Study Guide Pack
• Are actual taxes paid the same as how on the GAAP income statement? -✓✓No.
Actual Taxes = IRS Rules
Income Statement = GAAP
• Which decisions require using subjective estimates? -✓✓Economic life of a new asset.
• If there is a 30% change of a recession, what is the probability of expansion? -✓✓70%
*The sum of probabilities must equal 100%
• How much interest is paid on a 6% bond over 2 years and 3 months? -✓✓2 years and
3 months:
2 + (3/12) = 2 + (.25) = 2.25
6% x 1,000 = $60 per year
$60 x 2.25 = $135
• How does a "prudent investor" select investments? -✓✓Seeks the highest return for
"appropriate" amount of risk.
• What do points on the Efficient Frontier measure? -✓✓The maximum return for a given
level of risk; maximum Return-to-Risk ratio.
• What is "Beta?" -✓✓Measure of a stock's risk relative to the market.
• Why are accurate forecasts important? -✓✓Plan for resources for production; accurate
evaluation of capital projects.
• Which ratio is used in valuing a private company? -✓✓PE ratio in the "Comparable
Multiples" method.
• What are 3 costs associated with holding inventory? -✓✓1. Product
2. Storage
3. Opportunity
• What risk is eliminated by a diversified portfolio? -✓✓Idiosyncratic Risk - Risk affecting
a single firm.
, • What are the impacts of outsourcing? -✓✓Fewer U.S. jobs and lower priced products.
• What are the impacts of tariffs? -✓✓More U.S. jobs and higher product costs for
consumers.
• What securities are exempt from FEDERAL income taxation? -✓✓Municipal bond
interest is tax-exempt. Treasury securities ARE taxable.
• Why would a firm prefer to issue bonds rather than stock? -✓✓Debt has a lower
required return. Debt interest is tax deductible.
• What is the impact on the APY as the number of interest payments per year increase?
-✓✓APY increases
• What is the present value of future cash flows of a stock called? -✓✓Intrinsic Value -
The "real" value of the stock. PV of cash to investor.
• What indicates if a stock is a "good investment?" -✓✓The price of the stock is less
than the "intrinsic value."
• In the event of bankruptcy, what is the order of claims settlement? -✓✓1. Creditors
2. Subordinated Debt
3. Preferred Stock
4. Common Stock
• What is a spontaneous account? -✓✓One that changes with the level of sales --
Current Assets & Liabilities.
• What is a discretionary account? -✓✓One that changes due to management decision -
- Bonds Outstanding.
• If the financial ratios of 2 firms are compared, what is it called? -✓✓Cross-Sectional
Analysis
• If the debt ratio increases, what is the impact on Return on Equity (ROE)? -✓✓ROE
increases due to greater reliance on cheap debt financing.
• What financial structure causes profitability to be more volatile? -✓✓Leverage. Higher
leverage ratios mean more volatile profits.
• If debt is cheaper than equity, why not all debt? -✓✓Bankruptcy Risk -- Equity is the
cushion against bankruptcy.
