WGU C214 Financial Management Exam Questions and Answers

WGU C214 Financial Management Exam Questions and Answers Net Income = - Answer- Revenues - Expenses Revenues - Cost of Goods Sold (COGS) - Answer- Gross Profit Gross Profit - Operating Expenses - Answer- EBIT EBIT = - Answer- Sales - Costs - Depreciation EBIT = - Answer- Operating Profit or Operating Income EBIT - Interest Expense = - Answer- Earnings Before Taxes Earnings before Taxes - Tax Expense = - Answer- Net Income (NI) Retained Earnings - Answer- End RE = Beg RE + NI - Dividends END RE = - Answer- Beg RE + (Sales Revenue X Margin%) - Dividend Payout Ratio x (Sales Revenue X Margin %) Assets = - Answer- Liabilities + Owner's Equity Equity = - Answer- Assets - Liabilities State of Cash Flows - Answer- Shows the change in cash balance for a period of time Cash Flow from Operating Activities (CFO) - Answer- Net Income + Depreciation + Decrease in operating assets - increase in current assets - decrease in current liabilities + increase in current liabilities. Most common operating asset - Answer- Accounts Receivable Most common operating liability - Answer- Accounts Payable Cash Flow from Investing (CFI) - Answer- Investing activities in Property, Plant and Equipment (PP&E) CFI = - Answer- Gross PP&E end - Gross PP&E Beg CFI = - Answer- Net Change in PP&E(Current PP&E - Last Year PP&E) + Depreciation for Current Year Cash Flow from Financing (CFF) - Answer- Cash generated from financial activities CFF = - Answer- Net change in common stock + net change in long term liabilities - Dividends Gordon Growth Model (GGM) - Answer- Growth Rate and Dividends Vo (Value Today) = - Answer- D1 (dividend at eoy) / Kcs(required or expected rate of return) - g (growth rate) Kcs (required or expected rate of return) = - Answer- D1 ( dividend at EOY)/ Vo(value today) + g (growth rate) D1 (dividend at EOY) = - Answer- Do (Dividend now) x (1 + g(growth) Vps (value of preferred stock) = - Answer- D(always the same for PS)/ Kps (required or expected rate of return) Capital Asset Pricing Model - Answer- CAPM Capital Asset Pricing Model (CAPM) - Answer- a model that relates the required rate of return on a security to its systematic risk as measured by beta Efficient Frontier - Answer- Ratio that maximizes expected returns for a given level of risk Efficient Market Hypothesis (EMH) - Answer- Sophisticated investors will look at the stock and first forecast the cash flow that the stock will generate for the foreseeable future then will calculate the PV of the cash flows, that is how the price is determined. Capital Budgeting - Answer- Long term investment decisions, the process used in making investment decisions involving projects that generate cash flows over a multi- year time horizon Initial Outlay = - Answer- costs of assets + shipping costs + Working capital Initial Outlay (IO) = - Answer- Purchase price of new equipment + shipping and handling + WC Initial Outlay - Answer- Purchase price of the asset (usually negative) + S&H = Depreciable Asset + Old asset price + WC +/- tax or gain or loss (salvage) Salvage Value = - Answer- Old asset price sold -/+ book value X tax rate Differential Cash Flow(DCF) - Answer- Incremental Tax flow generated every year DFN (Discretionary Finance Needed) = - Answer- After Tax Income + Depreciation TCF (Terminal Cash Flow - Answer- After Tax Proceeds from sale of assets and release of working capital TCF (Terminal Cash Flow) = - Answer- After tax proceeds from sale of asset + release of working capital TCF - Answer- Realizable Salvage Value +/- tax effects + Working Capital NPV - Answer- Present value of after tax net cash flows NPV - Answer- Most commonly used method of Capital Budgeting NPV - Answer- Considers TVM, Results in a decision NPV - Answer- Ignores length of time to recover capital, difficult to compare, reported in dollars IRR ( Internal Rate of Return) - Answer- Discount rate that results in Zero NPV IRR - Answer- Considers TVM IRR - Answer- Assumes reinvestment at a constant rate, ignores uneven cash flows Free Cash Flow Method/Financing (FCFF) = - Answer- EBIT x (1- tax rate) + Depreciation - Change in Net Working Capital (CAPEX) - Inv