C214 Financial Management WGU 2024 Test Questions With Complete Solutions

C214 Financial Management WGU 2024 Test Questions With Complete Solutions If accounts receivable increases, what is the impact on CFO? - CFO decreases 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. If interest rates increase, what is the impact on the Weighted Average Cost of Capital (WACC)? - Required returns on debt and equity increase. Thus WACC increases. The Prospectus contains what information? - 1. Audited Financial Statements 2. Description of Security 3. Operating Information What is the purpose of the Securities and Exchange Commission (SEC)? - To ensure that U.S. investors in the U.S. markets are well informed. Why would a totally domestic firm worry about international trade? - Competition from foreign firm imports to the U.S. If a firm's ROE is greater than the Return on Assets (ROA), what does that mean? - The firm uses debt financing wisely to increase profitability. What is the term that refers to corporate managers acting in their own interests rather than the stockholders? - Agency Cost