WGU D076 Finance Skills for Managers Latest Updated Already Passed

WGU D076 Finance Skills for Managers Latest Updated Already Passed What is a reasonable alternative to keeping an emergency stash of cash? Investing in a savings account Investing in a readily withdrawable account that still earns some interest is a value-preserving alternative. Which area of finance deals with sources of funding and the capital structure of corporations and seeks to increase the value of a firm to its owners? Business finance is the area of finance that deals with uses and sources of funding to increase the value of the firm. What is the primary difference between finance and accounting? Finance focuses on the future, while accounting is generally backward-looking.Which subspecialty of finance primarily involves deciding which assets will create more wealth and earn positive returns? Investments is the area of finance that seeks to create wealth in the future by deciding where to allocate money. What is the primary goal of the financial manager of a firm? To maximize owner wealth. The financial manager should make decisions based on the primary goal of maximizing owner wealth. What should be the main question a firm asks when considering any investment decision? Do the benefits of this investment outweigh the costs?For any investment, you should expect to receive a benefit worth at least as much as the initial cost. What is the primary aim of personal finance goals? To maximize satisfaction from products purchased and services obtained. The objective of personal financial goals is to maximize one's utility. Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? Making financing decisions. The manager is deciding where to get the funds to support a new project, which means the manager is making a financing decision.Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? Private equity deals with investments in firms that are privately held and whose ownership is not yet bought or sold on any public stock exchange. Which task does a financial manager perform when assessing the costs and benefits of potential projects? Making investment decisions Managing working capital means overseeing day-to-day operations and cash flows. What tool can you use to understand your overall personal cash flows? Budgeting helps you to understand your income and expenses and to analyze your cash flows.You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making? Financing Part of the personal finance process is figuring out how to finance your goals in a way that is within your means What area of finance involves deciding which assets to invest in to create wealth in the future? Investments Investments are an area of finance that involves deciding which assets to invest in to create wealth in the future. Hannah is the financial manager of a firm. A project that she has recommended has been approved and will cost $5 million. Since the company does not have enough cash on reserve,Hannah must figure out how to raise enough money to start the project. She can choose whether to issue new bonds, new stocks, a mortgage loan, or some combination of those options. What task is Hannah performing in this scenario? Making a financing decision Since the project has already been approved, Hannah is trying to find a way to finance the investment and considering its capital structure. Maria and Mateo are setting financial goals. They decide that they need to save $200 each month to reach their goal of taking their children to visit their grandparents in Spain next summer. What is the objective of setting such a goal? To maximize individual utility While everyone has different personal financial goals, the objectives of such goals is to maximize individual utilityWhich professional works with individuals to help them achieve their financial goals? Financial planner Professional financial planners work with individuals to help them achieve their financial goals. Omar is about to purchase a new car for $30,000. He knows he wants to buy the car, but he is still trying to decide how to pay for it. He has barely over $30,000 in his bank account. He can either take out an auto loan from a bank or use a mix of cash and an auto loan. In this scenario, what is Omar doing? Financing a goal He has already made a decision to purchase the car and is now deciding on financing options. What are the purposes of financial markets? The purposes of financial markets are to provide liquidity and to determine prices.In which financial market are securities such as stocks and bonds are traded after their initial issuance? Secondary market Financial securities are first sold in the primary financial market and then traded among investors in the secondary financial market. What kind of market primarily allows institutions to borrow and lend in the short term? Money market Assets in money markets are typically highly liquid and intended for use within a year or less.A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? Primary market When a company issues stock for the first time to raise capital, shares must initially be sold through a primary market. What is the primary role of financial institutions? To conduct financial transactions such as investments, loans, and deposits What is a depository institution? An institution that accepts and pays interest on deposits of money, as well as extends loans Which financial institution ensures that a nation's economy remains healthy by controlling the amount of money circulating in the economy?Central banks control the supply of money in the economy How do insurance companies pay policyholders when a claim is made? Insurance companies invest the money that they earn from premiums into stocks and bonds, and then the returns are used to fill claims. Which type of financial institution deals mainly with providing for retirement through employers? Pension fund A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? Investment banks facilitate complex financial deals, like mergers. Unemployment rate is which type of economic indicator?Lagging indicators change after the economy changes. The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? Regulating inflation and unemployment is the main objective of the Federal Reserve and central banks, and it is accomplished by adjusting the interest rate. What would an inverted yield curve signal? An inverted yield curve reflects the expectation that the economy will have low or negative growth in the future. In what way are coincident indicators useful? They are analyzed during economic shifts to provide information about the current state of the economy.Which responsibility is a focus of the U.S. Securities and Exchange Commission? To protect investors The responsibilities of SEC are to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Which type of financial institution provides individuals and firms access to financial markets? Investment institutions Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? Private equity Yield curve is which type of economic indicator?Leading About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What does this information indicate about the future economy? It may indicate an economic downturn. Which term reflects a person's beliefs about right and wrong, good and bad, or just and unjust? Moral reflects one's beliefs about right and wrong, good and bad, or just and unjust. What characterizes an ethical action? An ethical action is based on accepted standards of conduct.Lucas is a financial advisor working for Bullzai, Inc. He is faced with a dilemma. Bullzai has started changing its practices in order to increase profit. As a financial advisor, he is now supposed to suggest to clients to invest in portfolios that will not do as well as the portfolios that Bullzai is invested in. This is an accepted practice done by other businesses in the industry, and it complies with all standards set by the government. However, Lucas knows that this practice is not in his clients' best interest. What type of dilemma is Lucas facing? Moral This is not a legal issue because the new practice complies with the law, and it is not an ethical issue because it is a commonly accepted practice within the industry. It is a moral issue because it deals with Lucas’s own sense of right and wrong. Which type of error would result in a set repercussion or penalty given by the government? LegalNora is an investment manager, which means that she is paid to invest other people's money. To meet her goal for the month, she is seeking to invest money from clients in an investment that is risky but potentially has a higher return. What about this situation represents an ethical dilemma? Nora is considering investing in a risky asset just to meet her monthly goal. Nora is caught between the obligation to meet her goal and the obligation to keep her clients’ money safe. As an investment manager, she is obligated to do what is best for the client. What are the effects of attempting to maximize shareholder value for a business in an unethical way? It often leads to decreased shareholder value for the business. Endothon Company has decided to move its production from the United States to a foreign country. Which situation below would constitute an unethical action by the company? Lowering costs while keeping prices the same for customers Monitoring public perception of the companyTelling current employees about the decision early on Saving money by paying inadequate wages to workers overseas Saving money by paying inadequate wages to workers overseas Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? Bondholders are primarily interested in making sure they will be paid back. If a company takes on a riskier project, there is a higher probability of the project being unsuccessful, which means that the bondholders may put themselves at a higher risk of not receiving their loan back. Which kind of projects are bondholders interested in? Safe projects with a higher chance of providing sufficient compensation. Bondholders provide money for a company for a certain period of time and want companies to pay them back for their investment."Which scenario is an example of an agency problem? The management team works overtime without pay to complete financial reports. An employee takes a potential client to dinner and pays for it using the company credit card. The owners of the company offer shares of the company to management. A manager purchases a company car and allocates it as a company expense. A manager purchases a company car and allocates it as a company expense. How can agency costs be mitigated? Aligning managers' interests with shareholders' interests What is the third step in finding a solution to an ethical dilemma? Consider all stakeholders involved First, you should identify and define the problem. Second, consider alternative courses of action. Third, consider all stakeholders involved.What does the term legal describe? An action that is in accordance with the laws and rules set by an authority. Jack is a personal financial advisor. He is with a new client, and the client is asking him what he recommends for her portfolio. Jack knows that his firm's investment product performed well last year, but its performance changes from year to year—some years it is better than the market, and some years it is not. Also, the fee to invest in the product is higher than the fee to invest in a market index fund. If Jack sells his company's investment product, the customer's loyalty to the company is doubled. Which actions should Jack take? Give a personal recommendation of the company's product while explaining its performance relative to the market over the past several years. Why might a manager manipulate accounting procedures? A manager might manipulate accounting procedures to inflate the earnings of a company, which would optimize bonuses and stock-price-related benefits for management.Which situation is an example of an agency problem? Managers follow their own interests instead of the owners' interest. A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose its ability to pay back the loan and the interest on the mortgage. What action might the bank take to protect its interest? Set a strict covenant that the company cannot easily achieve. By setting a strict covenant, there is a risk that the company may not meet its obligation, which would deter the company from taking on risky projects. What are the main services offered by financial institutions? Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactionsWhat is the main objective of personal financial goals? To maximize individual utility Why is understanding the definition of finance important in managing personal finances? It helps individuals compare the costs and benefits of an action to determine whether to take that action. In which type of market would a company issue bonds or stocks for the first time? Primary market Which type of financial institution is a mutual fund? Investment institution Which financial institution specializes in managing and administering retirement funds?Pension funds Which type of economic indicator is the consumer price index? Lagging indicator What does the term ethical refer to? The accepted standards of conduct that guide a person's behavior A company's officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? Agency problem due to conflicting interests What is the term for the percentage of the principal that a lender charges a borrower for the use of assets?Interest rate How is the interest rate expressed? As a percentage What is the main purpose of charging interest? It allows borrowers to pay to use the assets of another entity to accomplish their own goals. What is a component of the required rate of return? Opportunity cost Why would a long-term investment require a higher rate of return? There is greater risk because you cannot ensure the return of your investment for a longer period of time, and there is a higher opportunity cost because you cannot use that money for other things for a longer period of time.You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings account for the time being. What would be considered an opportunity cost of putting the money in savings? Buying a new car would be considered an opportunity cost because it is something you are giving up by keeping the money in your savings account. Five years ago, Ahmed decided he was going to save up to purchase a car with cash. The car he wants is priced at $15,000. He saved $245 a month in an account that gave him enough interest to have $15,000 in five years. Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider? Inflation Why is built-in inflation linked to adaptive expectations? Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher.Why does an increased demand for goods and services cause inflation? An increase in demand often causes an insufficient supply in the market, which causes prices to go up until the demand is once again equal to the supply. What happens to prices in a market in which there is inflation? Prices rise because of increase in demand, increase in cost of goods, and adaptive expectations. What is the compensation for risk given to investors called? Risk premium Which type of interest rate is the rate at which invested money grows for a certain period time? Nominal rateWhich component of an interest rate is an indicator of inflation and opportunity cost? Risk-free rate What is the name for the interest rate expressed on an annual basis? Annual percentage rate Why is the required rate of return also known as the hurdle rate? It is the minimum rate that a firm must surpass to accept a project. When a financial manager decides whether to invest in a certain project, the projected return needs to meet the minimum rate of return, or else the firm must “hurdle” the rate in order to accept the project. What is the inflation rate?The rate at which the average price level of a basket of goods and services in an economy increases What does the risk-free rate indicate? Inflation and opportunity cost Suppose Sophia is considering a new stock investment for her retirement account. This stock has significant risk, but is quite popular in the market. Inflation for the next few years is expected to be 2-3% per year, and the current U.S. Treasury rates are about 2%. How should she use this information to decide what type of return she can expect from the stock? Based on the inflation rate, she should expect this stock to provide a return higher than this for the associated risk Since the inflation of 2–3% will reduce any nominal returns she receives by this amount, she would want a higher return to accommodate for the opportunity costs and risks associated with the investment.What is the name for a series of equal payments made at the end of consecutive periods over a fixed length of time? Ordinary annuity If you invest $10,000 today and then $5,000 each year for the next 5 years into an investment with an interest rate of 4%, you can withdraw $39,248.14 in 5 years. What does $39,248.14 represent? Future value What is the name for the concept that a dollar today is worth more than a dollar in the future? Time value of money You are considering purchasing a house for $250,000. You have two options to finance it. One is a 20-year mortgage with an interest rate of 3.5%, and the other is a 30-year mortgage with an interest rate of 3.5%. Which mortgage option requires you to pay more in total interest?A 30-year mortgage Even though the interest rate is the same, the longer the loan is, the more interest you pay for the mortgage. Why does the time value of money play an important role in financial decision-making? Because the benefits of investments received at different times are comparable only when you consider the time value of money. With the time value of money, you can find today's value of future cash flows to compare the costs and benefits of different investments. Which statement below is an example of how ratios are used in the field of finance? Ratio analysis is performed based on a strict set of rules governed by generally accepted accounting principles. A firm's ratios may vary year over year, so they are not helpful for evaluating whether firm goals are met.Ratios are helpful only when comparing companies that are the same size and that use the same operational style. A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Why are ratios considered flexible? Because they are not regulated and can be changed or invented according to a firm's needs How might calculating financial ratios help shareholders? Ratios can be used to determine whether a firm is maximizing shareholder wealth. The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing in comparison to other similar firms. What is this process called? BenchmarkingWhat type of ratio is used to assess a firm's ability to meet short-term obligations without raising external capital? Liquidity ratios measure a firm's ability to meet short-term obligations without raising external capital. Why are several different types of ratios used to analyze a firm? Because different types of ratios are needed to get information about different parts of a firm What do leverage ratios describe? What proportions of equity and debt a firm uses to finance its assets A firm has paid off its short-term loans more quickly in the past couple of years. What might this trend indicate about the firm's financial ratios? Its liquidity ratio is increasing.Which type of ratio is a current ratio? Liquidity What is the main difference between the current ratio and the quick ratio? The current ratio includes inventory in current assets, and the quick ratio does not. The firm Betsy's Books has a market-to-book ratio of 1.2. What does this tell you about the firm? This firm is expected to grow in the future What does the net margin measure? The percent of revenue that is retained as profit for the firmWhich of these measures is a component of return on equity? Net margin How can the DuPont framework help a company assess its return on equity? It allows the company to determine how its abilities to generate profits, manage assets, and use financing contribute to the return on equity. Which action increases the return on equity of a firm if all else remains constant? Increasing debt financing What is a component of the DuPont framework? Return on assets What is one way that a firm can improve its return on equity? Successfully cutting production costs to boost net marginBigDog and SmallDog are two companies that have an identical return on equity. One difference between the two companies is that BigDog has 40% of assets financed by debt while SmallDog has 100% of assets financed by equity. What can you conclude about BigDog and SmallDog? SmallDog has a higher ROA than BigDog. Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of BigDog. Since both companies have the same ROE, SmallDog must have a higher ROA. Which actions, taken together, will certainly increase a firm's ROE? Decreasing equity financing and increasing net margin Decreasing equity financing increases the leverage multiplier, therefore increasing ROE, and increasing net margin also increases ROE.A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the industry benchmark. To achieve this goal, costs were cut in production through an investment in efficient equipment, and the company achieved a higher profit margin. If this continues, you are certain that the firm will achieve its goal in two years. What is this an example of? Progress measurement For what purpose are market ratios used? To evaluate the current share price of a public firm's stock You are considering starting a new business to sell Widgets in your hometown. You can import the Widgets at a low cost, and you hope to be able to sell them for significantly more. Which ratio can help you calculate how much profit you will earn from the sale of each Widget? (Assume you are only considering the cost of the Widget, not any other operating costs.) Gross margin tells you the percent of sales that become gross profit. The rest of the money earned from sales is used for the production of goods.What allows an investor to determine which financial activities are contributing to changes in the return on equity? DuPont framework Knowing that you are taking this finance class, a friend asks you about two investment opportunities he is considering. He wants to know which of the firms is using its assets more efficiently to generate sales. Which set of information could help you determine this? Firm A has an asset turnover of 4, and Firm B has an asset turnover of 2.5. Asset turnover is an indicator of how well a firm uses its assets to generate sales. Since Firm A generates $4 of sales for every $1 of assets, it is using its assets more efficiently. Which method of ratio analysis looks at a firm's performance over time? Trend analysis You are a financial analyst of an investment bank, and you are doing research on equity. You are looking at a book publisher's financial ratios in comparison to its competitors and the industry average. What is this an example of?Cross-sectional analysis Which type of ratio are suppliers interested in? Liquidity ratios assess a firm's ability to meet short-term obligations to short-term creditors and suppliers. What is the ratio that tells you on average how long it takes for a firm to collect accounts receivable? Average collection period The ACP tells how long on average it takes for a company to collect accounts receivable from its customers. What does a debt ratio of 40% indicate? It indicates that 40% of assets are financed by debt.What is operating margin useful for? Comparing the profitability of firms with different capital structures What does an average collection period of 70 tell you? On average, a firm takes 70 days to collect accounts receivable. What does high inventory turnover relative to the industry and competitors indicate? The firm does not hold enough inventory and is making its customers wait longer to receive their purchased goods. What is the difference between return on assets (ROA) and return on equity (ROE)? ROE considers the capital structure of a company, while ROA does not. DuPont framework tells you that ROE is ROA times leverage multiplier. The leverage multiplier represents the capital structure of the company.MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios, but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve its return on equity, which action would help? Reduce costs to improve its overall profitability. When evaluating a company's performance, what can variances on a company's cash budget indicate? Variances show that certain managers or divisions are not meeting targets. How far into the future do cash budgets usually forecast? Between one month and one year What are three principles of budgeting that are important to know before beginning the budgeting process? Keep records; develop savings, income, and expense strategies; and use a method that meets your needs and objectivesWhat are the three main uses of cash budgets? Cash budgets are used to forecast future financial need, aid in performance evaluation, and show when corrective action is needed. What is the correct order of the three steps necessary to create a cash budget? Determine cash receipts, estimate cash disbursements, create the cash budget Why is "put $50 in a savings account each month for Christmas gifts" a better budgeting goal than "save money for Christmas gifts"? Because it is specific and measurable Why would a monthly mortgage payment be considered a fixed expense? Because the payment is the same amount each monthWhich action would help you make your budget more efficient? Compare your budgeted cash flows to your actual cash flows, and then revise the budget if necessary. This would allow you to keep your budget updated and effective so you can make the best use of your money. Which item is an example of a cash receipt in a personal budget? A purchase of $53 for groceries and toiletries for the week A ski pass worth $65 that your roommate gives you in exchange for borrowing your car A graduation gift of $100 from your grandmother A payment of $125 for an annual doctor's visit A graduation gift of $100 from your grandmother Which item represents an example of a cash disbursement a business might have this month?A collection of accounts receivable on sales made last month A rent check paid and cashed for the warehouse the company uses A purchase of inventory on credit that will be paid off next month Interest earned on bank deposits held by the firm. A rent check paid and cashed for the warehouse the company uses Since this expense is being paid this month and the cash is being withdrawn from the company’s account, this represents an example of a cash disbursement. What three things should be included in a cash budget for a business? Cash receipts, cash disbursements, and borrowing Which items are considered cash disbursements for a business? Raw materials, rent, administrative expenses, interest, and selling expense Cash sales and accounts receivable Rent, accounts receivable, accounts payable, and raw materialsDividends, investments, cash sales, and tax liabilities Raw materials, rent, administrative expenses, interest, and selling expenses These are common products or services that a firm pays cash for during a specified period in order to generate sales. Why are sales not strictly considered to be the same thing as cash receipts? Sales include both cash sales and credit sales. Sales made on credit are not considered a cash receipt until the time period in which they are collected. What is the main reason why it is important to track and record cash flows? Tracking your cash flows allows you to recognize where and how your money is spent so you can monitor your cash flows and revise your budget as needed.In what situation might the software method of tracking be preferable to the spreadsheet method of tracking? When a person has a hard time remembering to record their cash flows and when they prefer to use a card to make purchases What is the purpose of monitoring your cash flows? Monitoring allows you to evaluate whether your actual cash flows are in line with your goals and to understand when correction or revision is needed. Which processes help you identify and fix problems in your budget? Monitoring your budget allows you to identify problems, and then gradual revision and implementation of new processes allow you to fix those problems.How do the benefits of knowing the cash position for each period differ between businesses and individuals? Knowing the cash position allows businesses to recognize when short-term loans are needed, while it allows individuals to analyze progress toward their personal financial goals. What is the difference between tracking and monitoring cash flows? Monitoring involves using your tracking record to evaluate cash flows against your target, identify patterns and changes in cash flows, and gauge when correction is needed. What role does financial forecasting play in the future success and growth of a firm? Financial forecasting supplements historical data with proposed investments or changes to allow for more accurate foresight. What is the goal of financial forecasting? To understand the implications of today's decisions on tomorrow's performanceWhich question is answered by financial forecasting? How much financing will the firm need in the future? How does financial forecasting help with financial decision-making? It helps decision makers understand the impacts of today's actions on the future performance of the firm. What is one of the fundamental purposes of financial forecasting? To estimate how changes in cost structures or sales will impact the future cash flows and financing needs of the firm What are spontaneous accounts? Accounts that vary naturally with salesWhich type of account changes with sales growth? Spontaneous accounts If a company expects sales to grow by 10% next year, which account might also increase by 10%? Cost of goods sold When can the discretionary financing needed (DFN) be determined? After pro-forma financial statements are forecasted using the percent of sales method Once all the financial statements are projected according to a given set of assumptions, you can determine the financing required to fund the predicted growth in sales. Which action decreases the discretionary financing needed (DFN)? Increasing the plowback ratio Increasing the plowback ratio increases projected owners’ equity and thus decreases DFN.You are a financial manager of a company, and you have projected sales increase for next year of 8%. Which action would you take when you conduct financial forecasting using the percent of sales method? Leave the notes payable account constant in the projected financial statements. Notes payable is a discretionary account. Thus, you should leave it constant in the projected financial statements. You are conducting financial forecasting for your firm given the projected sales. What are you doing if you are estimating changes in the balance sheet based on the predicted change in sales? Forecasting spontaneous accounts