WGU C214 Objective Assessment Financial Management Exam Latest Questions and Answers (2024/2025) (Verified Answers)
Characteristics of preferred stock includes “-dividends in arrears-dividends are cumulative-higher payoff claim in a BK (has first dibs in a BK)-considered “”hybrid”” (part stock/part bond)-no fixed maturity date-no voting rights-can skip dividend payments-dividends don’t change year-after-year-used in start ups (IPO)”
Preferred stock dividends can go without payment and pay in arrears the following year
Characteristics of common stock are -voting rights-no maturity date-corporate governance-lower payoff claim in BK-variable returns-unlimited earnings potential-earnings are in dividends & the increase in price of stock
New start up ventures often issue preferred stock (in an IPO)
What stock is considered a hybrid preferred stock
One thing common stock and preferred stock have in common is both have no maturity date
Which type of security has voting rights common stock
Debt covenants and restrictions help to ensure that management is meeting bond and shareholder expectationsNOTE: covenants are promises meant to be kept
What is true regarding bonds -when bond matures, bondholder gets lump sum back-coupon rate doesn’t change-maturity is in years-PAR value is typically $1000-Future value (same as PAR) is typically $1000
Bond sells at face value when required rate of return is equal to the coupon rate
Why are bonds the primary method for raising capital because bonds remove the intermediary costsNOTE: IPO’s require an intermediary known as a syndicate – a group of banks underwriting the security issue
What type of bond can be traded for stock convertible bonds
What is the interest rate for annual payments of a bond known as the coupon rateNOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged
Coupon rate is the established rate of the bond and should never change
Debentures are secured bondsNOTE: debentures are a debt instrument (bond) issued to raise cash, secured against a company’s assets and backed by credit, transferable by the holder, and may also be unsecured
Secured loan has collateral like a mortgage
The amount repaid at the expiration date of a bond is PAR valueNOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000
Duration measures the market risk of a bond and is the percentage drop in price caused by a 1% increase in yield (rate)NOTE: measurement of the drop in price after a rate increase
Maturity of bonds is calculated in years
A bond premium occurs when bonds are issued for an amount greater than their face or maturity amount; caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds
Junk Bonds are high yield bonds without any stability
“””Leveraged”” results in” having more debt (bonds) than equity (stock) and lower stock pricesNOTE: recall that debt is safer and levels out risk in a portfolio
In current assets, inventory is the LEAST liquid of current assetsNOTE: current assets take less than 12 months to make liquid
Net fixed assets are long term assets such as buildings, land, equipment, machineryNOTE: assets that are not current
A/P represents money paid to suppliers for what is bought on credit and amount owed by a business to suppliers by agreementNOTE: A/P is supplies, inventory, or PP&E
Notes payable involves an explicit interest bearing arrangement with the lender at interest costNOTE: notes payable is a long-term liability
Current liabilities are listed in order of maturityNOTE: current liabilities are to be paid within 12 months
Two things you can do with net income pay out as dividends or retain (plow back into the firm)
On the Statement of Cash Flows, CFO’s include -cash receipts from customers (inflow)-cash paid for inventory (outflow)-cash paid for wages (outflow)NOTE: receipts of cash is inflow & what is paid out is outflow
Which is NOT considered an operating expense interest expense is NOT considered an operating expense
On the Statement of Cash Flows, CFI includes cash receipts from sale of property and equipment (inflow), cash paid for purchase of equipment (outflow)NOTE: receipts of cash is inflow & what is paid out is outflow
Which of the following is true with respect to CFO an increase in inventory indicates a reduction in CFONOTE: there is a cost (reduction) to purchasing (increasing) inventory
The Statement of Cash Flows is not useful when addressing the financial health of a firm due to the impact of accrual accounting FALSE – the impact of accrual accounting is seen as MOST useful in relation to net income
Which is true with respect to CFF an increase in notes payable indicates an increase in CFF
Which is not a part of the Statement of Cash Flows cash flows from liquidating activitiesNOTE: cash flows are operating, investing, and financing
The sum of CFO + CFI + CFF is equal to the change in cash during the period
Depreciation expense is a significant source of difference between net income and CFO because depreciation is a non-cash expense on the Income Statement associated with the acquisition of long-term assets
Subordinated bonds are bonds not backed by collateral
For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet TRUENOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet
Increases in operating assets and decreases in operating liabilities will decrease CFONOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO)
Unsecured loan has no collateralNOTE: a credit card is an example
Assuming no asset disposals, CFI is the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense
Assuming no asset disposals, depreciation expense is equal to the change in ACCUMULATED depreciation
Assets are financed by other people’s money or equity
Dividends are considered CFF (financing section)
A firm with positive CFO should be considered healthy FALSENOTE: a positive CFO can still be detrimental to the firm depending on other factors
The increase in yield (rate) causes the bond prices to decrease (and vice-versa)NOTE: when interest rates increase, bond prices decrease
A working capital increase caused by an increase in inventory will be a cash outflowNOTE: capital increase is inventory purchased so money goes out
A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets FALSENOTE: a firm can NOT sustain negative CFO forever
Which should NOT be included in the calculation of CFF a change in retained earnings
Dividing CFO among the owners of a firm is a sustainable policy FALSENOTE: CFO doesn’t allow for required reinvestment
Dividing CFO among owners of a firm is NOT a sustainable policy TRUENOTE: CFO doesn’t allow for required reinvestment
A firm reports the following cash flow data CFO 1 million, CFI 750K, and CFF -100K. Is the firm sustainable Yes, the firm is sustainable. CFF may be due to paying down debt, buying back stock, or paying dividends
When calculating CFO, an increase in an operating liability such as A/P or accrued wages represents an inflow to the firmNOTE: if the firm owes to suppliers, more inventory is purchased and on hand (inflow)NOTE: Operating liability accounts are:Increases: an inflow of cashDecreases: an outflow of cash
CFO can be dramatically impacted by managerial discretion in the financial reporting process TRUENOTE: management has discretion which is why financial statements can be misleading
Management of cash flow from operations is dramatically impacted by managerial decisions
The impact of accrual accounting is seen as MOST useful in relation to net income
A change in notes payable (bank loans) will impact CFFNOTE: A/P and A/R impacts CFO; while notes payable (bank loans) are considered long-term and affect CFF
Which will decrease CFO an increase in A/R & a decrease in A/PNOTE:-when A/R is increased, product has been sold -when A/P is decreased, suppliers have been paidThese actions decrease CFO
Which represents assets in CFO A/R and inventory
Depreciation expense is added back in FCF because depreciation expense is a non-cash expense
FCFF can sustainably be distributed to the providers of capital
A company that increases A/R by $5000 in the recent period but expects to collect half in the next period, will see the change in A/R affect cash flows from the operating section as an inflow of casha decrease of cash flows by $5000NOTE: the $5000 received is an expected inflow of cash; however receiving $5000 indicates that the firm is down $5000 in inventory which is shown as a decrease
Retained Earnings (RE) are the earnings plowed back to finance the firm’s asset base and is NOT cash
The evolution of retained earnings is retained earnings left over is either retained in the company -or- paid out in dividends
How do you calculate the change in retained earnings (RE) RE = Net Income – DividendsNOTE: this equation can be inverted from formula sheet)
What is the equation for FCFF FCFF = EBIT * (1-tax rate) + depreciation – capital expenditures – increase in net working capital (NWC)NOTE: this equation can be easily located on the provided formula sheet
The firm in an industry with the largest CFO is the industry’s top performer FALSENOTE: a positive CFO can still be detrimental to the firm depending on other factors
As corporate tax rates increase the firm experiences a higher tax shield from interest
A tax cut increases WACC and the rate of return
The impact of a market rate increase will increase a firm’s cost of capital
EBIT is called considered operating income
Accounting income is lower than taxable income
Two examples of accounting estimates used in financial accounting are depreciation and useful life
An accounting difference is a difference in another company’s accounting method such as inventory methods
Income for tax purposes involves fewer managerial decisions than accounting income
GAAP allows for significant managerial discretionNOTE: GAAP gives firms much leeway
Efficient frontier is a ratio that maximizes expected return for a given level of risk
A highly risk averse investor should invest in index funds
Suppose a firm shows an increase in A/R of $100. Considered in isolation, which best describes the impact of this change the change will decrease CFO by $100NOTE: an increase in an asset account indicates a decrease of inventory
Price to earnings ratio (P/E) is used in the comparables method
Comparables method is similar firms equity valueNOTE: appraisals give comparables to reach an estimated value
Which type of firm would the replacement cost method be most appropriate for A holding company that primarily holds real estate assets
FCF is generated cash after spending the money required to maintain or expand asset base
In the DCF approach, we use some kind of FCF measure in the numerator
The matching principle requires that revenues matched to expenses incurred to generate the revenues
Suppose the inventory turnover of the company is higher than the industry. Which is likely selling out of product means that more is needed to be produced; inventory will be less and can result in less sold
Free cash flow (FCF) is – distributable cash- cash that can be distributed after funding required reinvestment in PP&E- increase working capital
FCF is different from CFO because FCF represents cash flow after required investment
Which is NOT a characteristic of ordinary annuities payments are made at the BEGINNING of each periodNOTE: remember annuities are payments and ordinary annuities are payments made at the END of the payment cycles (in arrears)
The control issues involved in running a firm are known as corporate governance
According to CAPM, if a firm has idiosyncratic risk the return required by shareholders will be higher FALSENOTE: CAPM model assumes idiosyncratic risk is diversified away
Which of the following is usually NOT a spontaneous account long-term debt is not spontaneousNOTE: buying a machinery is not a spontaneous purchase, it is planned
On what financial statement is retained earnings found the Balance Sheet
Suppose returns over the last 4 years were 15%, 12%, 27%, and 21%. If the mean return over the past 5 years was 20, what was the return 5 years ago? 25NOTE: .15 + .12 + .27 + .21 + n \ 5 = 20 so n = 25
What is dividends/net income called dividend payout ratioNOTE: equation is on the formula sheet
One of the WEAKNESSES of the payback method is that it is subjectiveNOTE: payback method weakness is subjective (its strength is NOT subjective
One of the STRENGTHS of the payback method is that the cutoff is subjective FALSENOTE: payback method weakness is subjective
Initial outlay for a capital project is calculated as purchase price (or cost of asset) + shipping & installation + increase investment or in working capital NOTE: equation is ICF in the formula sheet
The depreciable asset or depreciable base in the initial outlay calculation is purchase price of new asset + shipping costs + installation costs
For capital budgeting analysis, the relevant cash flows from a new project are called incremental cash flowsNOTE: the cash flows for a new project are HUGE; hence INCREMENTAL
Sometimes the amount of the reserve balance is determined by the bank from which the firm has obtained capitalNOTE: the lender/bank determines reserve balance requirements and all other underwriting requirements
A commonly used method for shortening the float time is electronic check processesing
A discount policy 2/10 net 30 means that a discount of 2% is applied if the payment is received within 10 days and the total bill is due in 30 days
What is the reciprocal of P/E earnings yieldNOTE:earnings yield = earnings per share/stock priceprice earnings ratio = stock price/earnings per share
DCF (differential cash flows) typically is best suited for established firms for which forecasting is fairly reliable
The last cash flow in the capital budgeting approach which typically uses the Gordon Growth Model to estimate all future cash flows beyond a certain point is the “terminal value of terminal cash flows (TCF)NOTE: the question asks for “”last”” cash flow in the approach; TCF is the last of the 3 cash flow approaches”
The goal of using a financial derivative such as a forward or a future is to make no profits through exchange rate movements
What is the primary motive for tariffs to protect domestic industries
The purpose of currency restriction is what to limit the ability of a foreign firm to take capital outlay out of a country
Accrual accounting is superior because cash accounting can be inaccurate since the receipt and disbursement of cash is frequently not synchronized with operating variablesNOTE: in accrual accounting, revenues and expenses are recorded when they are earned and project is complete- synchronized
When two rates are given in a word problem the coupon rate should be multiplied by FV
A simple interest problem formula is simple interest = principle number of years
Sensitivity rates analyze “the uncertainty of forecasted assumptions regarding investment projectsNOTE: what makes the rate sensitive is the “”uncertainty”” & “”assumption”””
I/Y can be described as the rate of return, the yield, or the interest rate
In the CAPM framework, why do investors hold the market portfolio any stock with higher expected returns relative to risk will converge to the market portfolio
If no future value is given in a problem assume FV is $1000 or you are solving for FV
Accounts that vary directly with sales are called spontaneous accountsNOTE: sales are almost always spontaneous; very seldom do we buy a new pair of shoes because we planned to do so
If future value and present value are given in a problem use the +/- key for PV
If problem is semi-annual N doubles, IY and PMT are 1/2 N = x2I/Y = /2PMT = /2NOTE: if a coupon rate is given in the problem, and solving for PMT or IY, do NOT double the resulting answer b/c coupon rates don’t change
How do we compute future levels of spontaneous accounts multiply projected levels of sales by historical percent of salesNOTE: compare by utilizing previous sales percentages
The formula for a preferred stock word problem is dividend rate / discount rateNOTE: leave out the PAR value ($1000) provided in the problem
“The formula for a perpetual annuity with “”growth”” in the problem is” PV = payment * (interest rate – growth rate)
If problem has BEGINNING change calculator to BEGIN mode
Hedging strategies minimize differences and reduce exposure of gains and losses due to the international business climate
The result of imports and exports are imports to the US become cheaper to US consumers while exports become more expensive to foreign consumers
A collection float can be specifically defined as the time it takes for a firm to be able to use the payments from customers
All firms wishing to make an IPO for non accredited investors must file public disclosure to the SEC
What is NOT part of the Sarbanes Oxley ACT assigning a specific accounting firm to audit a company
Which ACT instituted in an effort to help prevent bank runs Federal Reserve ACT of 1913 prevents bank runsNOTE: a bank run is when the public runs to withdraw their money
How is operating balance is different than reserve balance operating balance includes cash held to pay immediate bills like A/P and reserve balance is cash held for unforeseen circumstances
Which committee was created from the Dodd Frank ACT Financial Stability Oversight Council (FSOC)NOTE: Dodd Frank ACT was established to prevent banks from becoming too big to fail; a council was assigned to carry out the objectives within the ACT
Which ACT limited types of products a consumer bank could offer or hold, creating a wall between community banks and investment banks “Glass-Steagall Banking ACT of 1933NOTE: think a “”glass wall”””
Which ACT loosened the regulations on types of products banks could offer “Garn-St. Germain ACT of 1982NOTE: think St. Germain is a liqueur; alcohol “”loosens”” the senses”
FINRA is a private or public organization private
FINRA is a private organization overseen by the SEC
The Income Statement equation is Revenues – Expenses = Net Income
The Income Statement consists of P&L, Revenues & Expenses, and a PERIOD of time
The Income Statement may help you to understand the firms operations but net income does not necessarily show cash to the company
Income Statement and Cash Flow Statement both represent a PERIOD in time (the Balance Sheet is the only POINT-in-time financial statement)
On an Income Statement interest payments are deducted before taxes are calculated
Accounting income is reported as net income on the Income Statement, requires managers to make many choices, and is different from taxable income
A Statement of Cash Flows includes operating, investing, and financing sections for a PERIOD of time
Basic Balance Sheet equation is equity = assets – liabilities at a POINT in time
The basic Balance Sheet equation states that assets are equal to liabilities. This is because all assets are financed by other people’s money or a firm’s money
Why is the Balance Sheet known as permanent because other statements are reset at the end of the fiscal year
“The formula for a perpetual annuity with “”forever”” in the problem is” PV = payment / interest rate NOTE: equation is given on the formula sheet
“What components are part of “”total”” assets on the Balance Sheet” cash, A/R, inventory, long-term assets
“What components are part of “”current”” assets on the Balance Sheet” cash, A/R, inventory, short-term investments
Net fixed assets represents the original cost of the firm’s assets held for use less ACCUMULATED depreciation
“What components are part of “”total”” liabilities on the Balance Sheet” A/P, mortgages, PP&E, fixed assets (over 1 year)
“What components are part of “”current”” liabilities on the Balance Sheet” A/P, notes payable in 1 year, wages payable, interest payable, income tax payable, principle of a loan payable in 1 year, other accrued expenses payable
The use of the historical cost principle on the Balance Sheet means most assets are stated at the original cost less depreciation
PP&E over 1 year (also known as fixed assets) goes on the Balance Sheet
Operating expenses are not associated with production and include office space, admin expenses, depreciation expense, and R&D
Securities are initially offered (IPO) in the primary marketNOTE: IPO’s are not traded on the secondary market
Two secondary markets are auction market (NYSE) and dealer market (NASDAQ)
A dealer market is a secondary market
An auction market is a secondary market
Treasury bonds are taxableNOTE: Municipal bonds are NOT taxable