WGU C214 OA Financial Management Retake
Exam
Questions and Answers (2022\/2023)
(Verified Answers)<\/p>\n\n\n\n
Change in PPE 1,00
0
Change on long term
liabilities
600
Dividends paid 100
What is the firm\u2019s cash flow from financing activities? CFF
Increase in debt 600 + (no change in stock) 0 \u2013 (dividends paid) 100 = 500<\/p>\n\n\n\n
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)<\/p>\n\n\n\n
Preferred stock dividends
can go without payment and pay in arrears the following year<\/p>\n\n\n\n
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<\/p>\n\n\n\n
New start up ventures often issue
preferred stock (in an IPO)<\/p>\n\n\n\n
What stock is considered a hybrid
preferred stock<\/p>\n\n\n\n
One thing common stock and preferred stock have in common is
both have no maturity date<\/p>\n\n\n\n
Which type of security has voting rights
common stock<\/p>\n\n\n\n
Debt covenants and restrictions help to ensure that
management is meeting bond and shareholder expectations
NOTE: covenants are promises meant to be kept<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Bond sells at face value when
required rate of return is equal to the coupon rate<\/p>\n\n\n\n
Why are bonds the primary method for raising capital
because bonds remove the intermediary costs
NOTE: IPO’s require an intermediary known as a syndicate – a group of banks underwriting the security issue<\/p>\n\n\n\n
What type of bond can be traded for stock
convertible bonds<\/p>\n\n\n\n
What is the interest rate for annual payments of a bond known as
the coupon rate
NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged<\/p>\n\n\n\n
Coupon rate is the established rate of the bond and should
never change<\/p>\n\n\n\n
Debentures are
secured bonds
NOTE: 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<\/p>\n\n\n\n
Secured loan
has collateral like a mortgage<\/p>\n\n\n\n
The amount repaid at the expiration date of a bond is
PAR value
NOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Maturity of bonds is calculated in
years<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Junk Bonds are
high yield bonds without any stability<\/p>\n\n\n\n
“Leveraged” results in
having more debt (bonds) than equity (stock) and lower stock prices
NOTE: recall that debt is safer and levels out risk in a portfolio<\/p>\n\n\n\n
In current assets, inventory is the
LEAST liquid of current assets
NOTE: current assets take less than 12 months to make liquid<\/p>\n\n\n\n
Net fixed assets are
long term assets such as buildings, land, equipment, machinery
NOTE: assets that are not current<\/p>\n\n\n\n
A\/P represents money paid to
suppliers for what is bought on credit and amount owed by a business to suppliers by agreement
NOTE: A\/P is supplies, inventory, or PP&E<\/p>\n\n\n\n
Notes payable involves
an explicit interest bearing arrangement with the lender at interest cost
NOTE: notes payable is a long-term liability<\/p>\n\n\n\n
Current liabilities are listed in order of
maturity
NOTE: current liabilities are to be paid within 12 months<\/p>\n\n\n\n
Two things you can do with net income
pay out as dividends or retain (plow back into the firm)<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Which is NOT considered an operating expense
interest expense is NOT considered an operating expense<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Which of the following is true with respect to CFO
an increase in inventory indicates a reduction in CFO
NOTE: there is a cost (reduction) to purchasing (increasing) inventory<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Which is true with respect to CFF
an increase in notes payable indicates an increase in CFF<\/p>\n\n\n\n
Which is not a part of the Statement of Cash Flows
cash flows from liquidating activities
NOTE: cash flows are operating, investing, and financing<\/p>\n\n\n\n
The sum of CFO + CFI + CFF is equal to
the change in cash during the period<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Subordinated bonds
are bonds not backed by collateral<\/p>\n\n\n\n
For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet
TRUE
NOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet<\/p>\n\n\n\n
Increases in operating assets and decreases in operating liabilities will
decrease CFO
NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO)<\/p>\n\n\n\n
Unsecured loan
has no collateral
NOTE: a credit card is an example<\/p>\n\n\n\n
Assuming no asset disposals, CFI is
the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense<\/p>\n\n\n\n
Assuming no asset disposals, depreciation expense is equal to
the change in ACCUMULATED depreciation<\/p>\n\n\n\n
Assets are financed by
other people’s money or equity<\/p>\n\n\n\n
Dividends are considered
CFF (financing section)<\/p>\n\n\n\n
A firm with positive CFO should be considered healthy
FALSE
NOTE: a positive CFO can still be detrimental to the firm depending on other factors<\/p>\n\n\n\n
The increase in yield (rate) causes
the bond prices to decrease (and vice-versa)
NOTE: when interest rates increase, bond prices decrease<\/p>\n\n\n\n
A working capital increase caused by an increase in inventory will be
a cash outflow
NOTE: capital increase is inventory purchased so money goes out<\/p>\n\n\n\n
A firm can sustain negative CFO indefinitely by borrowing, selling equity, and\/or by selling assets
FALSE
NOTE: a firm can NOT sustain negative CFO forever<\/p>\n\n\n\n
Which should NOT be included in the calculation of CFF
a change in retained earnings<\/p>\n\n\n\n
Dividing CFO among the owners of a firm is a sustainable policy
FALSE
NOTE: CFO doesn’t allow for required reinvestment<\/p>\n\n\n\n
Dividing CFO among owners of a firm is NOT a sustainable policy
TRUE
NOTE: CFO doesn’t allow for required reinvestment<\/p>\n\n\n\n
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<\/p>\n\n\n\n
When calculating CFO, an increase in an operating liability such as A\/P or accrued wages represents
an inflow to the firm
NOTE: if the firm owes to suppliers, more inventory is purchased and on hand (inflow)
NOTE: Operating liability accounts are:
Increases: an inflow of cash
Decreases: an outflow of cash<\/p>\n\n\n\n
CFO can be dramatically impacted by managerial discretion in the financial reporting process
TRUE
NOTE: management has discretion which is why financial statements can be misleading<\/p>\n\n\n\n
Management of cash flow from operations
is dramatically impacted by managerial decisions<\/p>\n\n\n\n
The impact of accrual accounting is seen as
MOST useful in relation to net income<\/p>\n\n\n\n
A change in notes payable (bank loans) will
impact CFF
NOTE: A\/P and A\/R impacts CFO; while notes payable (bank loans) are considered long-term and affect CFF<\/p>\n\n\n\n
Which will decrease CFO
an increase in A\/R & a decrease in A\/P
NOTE:
-when A\/R is increased, product has been sold
-when A\/P is decreased, suppliers have been paid
These actions decrease CFO<\/p>\n\n\n\n
Which represents assets in CFO
A\/R and inventory<\/p>\n\n\n\n
Depreciation expense is added back in FCF because
depreciation expense is a non-cash expense<\/p>\n\n\n\n
FCFF can sustainably be distributed
to the providers of capital<\/p>\n\n\n\n
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 cash
a decrease of cash flows by $5000
NOTE: 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<\/p>\n\n\n\n
Retained Earnings (RE) are
the earnings plowed back to finance the firm’s asset base and is NOT cash<\/p>\n\n\n\n
The evolution of retained earnings is
retained earnings left over is either retained in the company -or- paid out in dividends<\/p>\n\n\n\n
How do you calculate the change in retained earnings (RE)
RE = Net Income – Dividends
NOTE: this equation can be inverted from formula sheet)<\/p>\n\n\n\n
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<\/p>\n\n\n\n
The firm in an industry with the largest CFO is the industry’s top performer
FALSE
NOTE: a positive CFO can still be detrimental to the firm depending on other factors<\/p>\n\n\n\n
As corporate tax rates increase
the firm experiences a higher tax shield from interest<\/p>\n\n\n\n
A tax cut
increases WACC and the rate of return<\/p>\n\n\n\n
The impact of a market rate increase will
increase a firm’s cost of capital<\/p>\n\n\n\n
EBIT is called considered
operating income<\/p>\n\n\n\n
Accounting income is
lower than taxable income<\/p>\n\n\n\n
Two examples of accounting estimates used in financial accounting are
depreciation and useful life<\/p>\n\n\n\n
An accounting difference is
a difference in another company’s accounting method such as inventory methods<\/p>\n\n\n\n
Income for tax purposes
involves fewer managerial decisions than accounting income<\/p>\n\n\n\n
GAAP allows for
significant managerial discretion
NOTE: GAAP gives firms much leeway<\/p>\n\n\n\n
Efficient frontier is
a ratio that maximizes expected return for a given level of risk<\/p>\n\n\n\n
A highly risk averse investor should invest in
index funds<\/p>\n\n\n\n
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 $100
NOTE: an increase in an asset account indicates a decrease of inventory<\/p>\n\n\n\n
Price to earnings ratio (P\/E) is used in the
comparables method<\/p>\n\n\n\n
Comparables method is
similar firms equity value
NOTE: appraisals give comparables to reach an estimated value<\/p>\n\n\n\n
Which type of firm would the replacement cost method be most appropriate for
A holding company that primarily holds real estate assets<\/p>\n\n\n\n
FCF is generated cash
after spending the money required to maintain or expand asset base<\/p>\n\n\n\n
In the DCF approach, we use some kind of FCF measure in the
numerator<\/p>\n\n\n\n
The matching principle requires that
revenues matched to expenses incurred to generate the revenues<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Free cash flow (FCF) is<\/p>\n\n\n\n
FCF is different from CFO because
FCF represents cash flow after required investment<\/p>\n\n\n\n
Which is NOT a characteristic of ordinary annuities
payments are made at the BEGINNING of each period
NOTE: remember annuities are payments and ordinary annuities are payments made at the END of the payment cycles (in arrears)<\/p>\n\n\n\n
The control issues involved in running a firm are known as
corporate governance<\/p>\n\n\n\n
According to CAPM, if a firm has idiosyncratic risk the return required by shareholders will be higher
FALSE
NOTE: CAPM model assumes idiosyncratic risk is diversified away<\/p>\n\n\n\n
Which of the following is usually NOT a spontaneous account
long-term debt is not spontaneous
NOTE: buying a machinery is not a spontaneous purchase, it is planned<\/p>\n\n\n\n
On what financial statement is retained earnings found
the Balance Sheet<\/p>\n\n\n\n
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?
25
NOTE: .15 + .12 + .27 + .21 + n \\ 5 = 20 so n = 25<\/p>\n\n\n\n
What is dividends\/net income called
dividend payout ratio
NOTE: equation is on the formula sheet<\/p>\n\n\n\n
One of the WEAKNESSES of the payback method is that it is
subjective
NOTE: payback method weakness is subjective (its strength is NOT subjective<\/p>\n\n\n\n
One of the STRENGTHS of the payback method is that the cutoff is subjective
FALSE
NOTE: payback method weakness is subjective<\/p>\n\n\n\n
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<\/p>\n\n\n\n
The depreciable asset or depreciable base in the initial outlay calculation is
purchase price of new asset + shipping costs + installation costs<\/p>\n\n\n\n
For capital budgeting analysis, the relevant cash flows from a new project are called
incremental cash flows
NOTE: the cash flows for a new project are HUGE; hence INCREMENTAL<\/p>\n\n\n\n
Sometimes the amount of the reserve balance is determined by the bank from which
the firm has obtained capital
NOTE: the lender\/bank determines reserve balance requirements and all other underwriting requirements<\/p>\n\n\n\n
A commonly used method for shortening the float time is
electronic check processesing<\/p>\n\n\n\n
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<\/p>\n\n\n\n
What is the reciprocal of P\/E
earnings yield
NOTE:
earnings yield = earnings per share\/stock price
price earnings ratio = stock price\/earnings per share<\/p>\n\n\n\n
DCF (differential cash flows) typically is best suited for
established firms for which forecasting is fairly reliable<\/p>\n\n\n\n
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<\/p>\n\n\n\n
The goal of using a financial derivative such as a forward or a future is to
make no profits through exchange rate movements<\/p>\n\n\n\n
What is the primary motive for tariffs
to protect domestic industries<\/p>\n\n\n\n
The purpose of currency restriction is what
to limit the ability of a foreign firm to take capital outlay out of a country<\/p>\n\n\n\n
Accrual accounting is superior because
cash accounting can be inaccurate since the receipt and disbursement of cash is frequently not synchronized with operating variables
NOTE: in accrual accounting, revenues and expenses are recorded when they are earned and project is complete- synchronized<\/p>\n\n\n\n
When two rates are given in a word problem
the coupon rate should be multiplied by FV<\/p>\n\n\n\n
A simple interest problem formula is
simple interest = principle I\/Y number of years<\/p>\n\n\n\n
Sensitivity rates analyze
the uncertainty of forecasted assumptions regarding investment projects
NOTE: what makes the rate sensitive is the “uncertainty” & “assumption”<\/p>\n\n\n\n
I\/Y can be described as
the rate of return, the yield, or the interest rate<\/p>\n\n\n\n
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<\/p>\n\n\n\n
If no future value is given in a problem
assume FV is $1000 or you are solving for FV<\/p>\n\n\n\n
Accounts that vary directly with sales are called
spontaneous accounts
NOTE: sales are almost always spontaneous; very seldom do we buy a new pair of shoes because we planned to do so<\/p>\n\n\n\n
If future value and present value are given in a problem
use the +\/- key for PV<\/p>\n\n\n\n
If problem is semi-annual
N doubles, IY and PMT are 1\/2
N = x2
I\/Y = \/2
PMT = \/2
NOTE: 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<\/p>\n\n\n\n
How do we compute future levels of spontaneous accounts
multiply projected levels of sales by historical percent of sales
NOTE: compare by utilizing previous sales percentages<\/p>\n\n\n\n
The formula for a preferred stock word problem is
dividend rate \/ discount rate
NOTE: leave out the PAR value ($1000) provided in the problem<\/p>\n\n\n\n
The formula for a perpetual annuity with “growth” in the problem is
PV = payment * (interest rate – growth rate)<\/p>\n\n\n\n
If problem has BEGINNING
change calculator to BEGIN mode<\/p>\n\n\n\n
Hedging strategies
minimize differences and reduce exposure of gains and losses due to the international business climate<\/p>\n\n\n\n
The result of imports and exports are
imports to the US become cheaper to US consumers while exports become more expensive to foreign consumers<\/p>\n\n\n\n
A collection float can be specifically defined as
the time it takes for a firm to be able to use the payments from customers<\/p>\n\n\n\n
All firms wishing to make an IPO for non accredited investors
must file public disclosure to the SEC<\/p>\n\n\n\n
What is NOT part of the Sarbanes Oxley ACT
assigning a specific accounting firm to audit a company<\/p>\n\n\n\n
Which ACT instituted in an effort to help prevent bank runs
Federal Reserve ACT of 1913 prevents bank runs
NOTE: a bank run is when the public runs to withdraw their money<\/p>\n\n\n\n
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<\/p>\n\n\n\n
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<\/p>\n\n\n\n
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 1933
NOTE: think a “glass wall”<\/p>\n\n\n\n
Which ACT loosened the regulations on types of products banks could offer
Garn-St. Germain ACT of 1982
NOTE: think St. Germain is a liqueur; alcohol “loosens” the senses<\/p>\n\n\n\n
FINRA is a private or public organization
private<\/p>\n\n\n\n
FINRA is a private organization overseen by the
SEC<\/p>\n\n\n\n
The Income Statement equation is
Revenues – Expenses = Net Income<\/p>\n\n\n\n
The Income Statement consists of
P&L, Revenues & Expenses, and a PERIOD of time<\/p>\n\n\n\n
The Income Statement may help you to understand the firms operations but
net income does not necessarily show cash to the company<\/p>\n\n\n\n
Income Statement and Cash Flow Statement both represent
a PERIOD in time (the Balance Sheet is the only POINT-in-time financial statement)<\/p>\n\n\n\n
On an Income Statement interest payments are
deducted before taxes are calculated<\/p>\n\n\n\n
Accounting income is
reported as net income on the Income Statement, requires managers to make many choices, and is different from taxable income<\/p>\n\n\n\n
A Statement of Cash Flows includes
operating, investing, and financing sections for a PERIOD of time<\/p>\n\n\n\n
Basic Balance Sheet equation is
equity = assets – liabilities at a POINT in time<\/p>\n\n\n\n
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<\/p>\n\n\n\n
Why is the Balance Sheet known as permanent
because other statements are reset at the end of the fiscal year<\/p>\n\n\n\n
The formula for a perpetual annuity with “forever” in the problem is
PV = payment \/ interest rate
NOTE: equation is given on the formula sheet<\/p>\n\n\n\n
What components are part of “total” assets on the Balance Sheet
cash, A\/R, inventory, long-term assets<\/p>\n\n\n\n
What components are part of “current” assets on the Balance Sheet
cash, A\/R, inventory, short-term investments<\/p>\n\n\n\n
Net fixed assets represents
the original cost of the firm’s assets held for use less ACCUMULATED depreciation<\/p>\n\n\n\n
What components are part of “total” liabilities on the Balance Sheet
A\/P, mortgages, PP&E, fixed assets (over 1 year)<\/p>\n\n\n\n
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<\/p>\n\n\n\n
The use of the historical cost principle on the Balance Sheet means
most assets are stated at the original cost less depreciation<\/p>\n\n\n\n
PP&E over 1 year (also known as fixed assets) goes on the
Balance Sheet<\/p>\n\n\n\n
Operating expenses are
not associated with production and include office space, admin expenses, depreciation expense, and R&D<\/p>\n\n\n\n
Securities are initially offered (IPO)
in the primary market
NOTE: IPO’s are not traded on the secondary market<\/p>\n\n\n\n
Two secondary markets are
auction market (NYSE) and dealer market (NASDAQ)<\/p>\n\n\n\n
A dealer market is a
secondary market<\/p>\n\n\n\n
An auction market is a
secondary market<\/p>\n\n\n\n
Treasury bonds are
taxable
NOTE: Municipal bonds are NOT taxable<\/p>\n\n\n\n
T1 Primary financial markets
the markets in which securities (stocks and bonds) are first issued. This is where the issuers (the firms) and the buyers (the investors) will engage in an exchange.<\/p>\n\n\n\n
T1 Syndicate
When a company wants to issue stock, bonds, or other publicly traded securities, it hires an underwriter to manage what is often a long and complex process.
After determining the offering structure, the underwriter usually assembles what is called a syndicate to get help manage the minutiae (and risk) of large offerings. A syndicate is a group of investment banks and brokerage firms that commit to sell a certain percentage of the offering.<\/p>\n\n\n\n
A group of intermediaries that is used to oversee the issuance of stocks and bonds. Syndicates are generally made up of large investment banks or other types of institutional investors.<\/p>\n\n\n\n
Competitive sale
those wishing to underwrite the bond issue will submit bids (on the bond’s prices and interest rate) to the issuing firm. The firm will then select the underwriter that offered the highest price and lowest interest rate. The underwriter will then sell the bonds to various investors at (hopefully) a slightly higher price than that at which the bonds were purchased<\/p>\n\n\n\n
Negotiated sale
is the process of underwriters submitting proposals including bids. involves a more thorough interview process with the underwriters. The issuing firm will carefully select the management team that will place these bonds.<\/p>\n\n\n\n
Secondary Financial Markets
Where securities after they are sold for the first time are traded.<\/p>\n\n\n\n
Auction Market
A market with a physical location and prices are set by the investors willingness to pay. (New york Stock Exchange)<\/p>\n\n\n\n
Dealer Market
No physical location made up of multiple dealers who take inventory of stocks and prices (NASDAQ)<\/p>\n\n\n\n
The bid Ask spread
the difference between the bid price and the ask price<\/p>\n\n\n\n
Limit orders
orders that are price contingent – orders are only executed if the value of the market reaches the price of the limit.<\/p>\n\n\n\n
Market Orders
Orders that are time contingent – First come first serve<\/p>\n\n\n\n
Friedmans three roles of prices.<\/p>\n\n\n\n
Price Efficiency
whether prices fully reflect all of the available information about a particular security<\/p>\n\n\n\n
Dollar Returns
calculated by taking the difference between the price of the security during the previous time period and the price of the security at the current time period, plus any additional cash flow that came from the security<\/p>\n\n\n\n
Percentage Returns
Percentage returns are calculated by simply dividing the dollar returns by the price of the security at time t-1, or the previous time period.<\/p>\n\n\n\n
Agency Cost
costs that are incurred when management does not act in the best interests of shareholders<\/p>\n\n\n\n
2 issues that effect profit maximization<\/p>\n\n\n\n
Cash Flow Statement
Cash flows from operations, investing and financing activities<\/p>\n\n\n\n
Cash accounting
counts cash out as expense and cash in as revenue<\/p>\n\n\n\n
Accrual accounting
Revenue is recognized when the earnings process is complete.<\/p>\n\n\n\n
Revenue Recognition
Timing of recognition of sales or income based on certain rules.<\/p>\n\n\n\n
Gross Profit
Revenue – Cost of goods sold (COGS)<\/p>\n\n\n\n
EBIT
Earnings before Interest and Taxes (AKA Operating Income)<\/p>\n\n\n\n
COGS
Cost of goods sold = direct labor and materials.<\/p>\n\n\n\n
Gross Fixed Assets
the original cost of the firm’s fixed assets before accumulated depreciation<\/p>\n\n\n\n
Net PP&E
original purchase price (historical cost) minus accumulated depreciation<\/p>\n\n\n\n
Historical Cost
What the asset was originally purchased for not the current value. Used in accrual accounting.
(most assets are stated at the original cost less depreciation)<\/p>\n\n\n\n
Retained Earnings
money put back into the company from prior net income.<\/p>\n\n\n\n
Net Income =
Dividends + Change in retained Earnings<\/p>\n\n\n\n
there are only two things a company can do with net income
1) pay it out as dividends to shareholders, or 2) retain it within the firm.<\/p>\n\n\n\n
New Retained Earnings =
Old Retained Earnings + Net Income – Dividends<\/p>\n\n\n\n
Free cash flow (FCF)
the cash that can be distributed after funding required reinvestment in PP&E as well as increased working capital.<\/p>\n\n\n\n
Gross Cash Flows
the sum of CFO, CFI, and CFF<\/p>\n\n\n\n
Things that cause managers to move cash from one category to another
Core activities
Cash flow management
Market pressure<\/p>\n\n\n\n
Difference between CFO and Net income<\/p>\n\n\n\n
indirect method
start with net income and adjust for differences between net income and CFO.<\/p>\n\n\n\n
CFO=
Net Income + depreciation expenses + Change in Operating accounts<\/p>\n\n\n\n
CFI =
Changes in PPE End Gross PPE – Begining Gross PPE<\/p>\n\n\n\n
Net PPE
Gross PPE- Accumulated Depreciation.<\/p>\n\n\n\n
Gross PPE
Net PPE+ Accumulated Depreciation<\/p>\n\n\n\n
FCFF
the cash distributable to all the providers of capital (i.e., to both debt and equity holders) and is most commonly used in financial analysis<\/p>\n\n\n\n
FCFE
the cash distributable to the equity holders after satisfying all obligations to debt holders<\/p>\n\n\n\n
Dividends
the cash actually distributed to stockholders;<\/p>\n\n\n\n
CAPEX
Capital Expenditures How much the firm spends on fixed assets.<\/p>\n\n\n\n
Ratio
one number from a financial statement and divide it by another so that you can analyze the health of a firm or compare two firms.<\/p>\n\n\n\n
4 categories of ratios
liquidity
asset use efficiency
financing
profitability<\/p>\n\n\n\n
Benefits of Ratios
Standardization
flexibility
focus<\/p>\n\n\n\n
Current Ratio
A liquidity tool
Current assets\/ current liabilities
Higher number is better
number of assets the firm has for every liability<\/p>\n\n\n\n
Current liability
Debt requiring payment within the next 12 months<\/p>\n\n\n\n
Current assets
Assets that will earn revenue within the next year.<\/p>\n\n\n\n
Quick Ratio
A liquidity tool
(Current assets – inventory)\/current liabilities
High number is better
number of assets the firm has minus the inventory for every liability. Inventory is the least liquid of assets.<\/p>\n\n\n\n
Accounts receivable turnover
A liquidity tool
Credit sales \/ Accounts receivable
AR turnover and ACP provide the same information<\/p>\n\n\n\n
Average collection period (ACP)
Liquidity tool
365\/Accounts receivable turnover
AR turnover and ACP provide the same information
number of times a year that AR turns over.<\/p>\n\n\n\n
inventory turnover
liquidity tool
COGS\/INVENTORY<\/p>\n\n\n\n
Days on hand (DOH)
Liquidity tool
365\/inventory turnover
conclusion will tell how much inventory the firm has on hand in number of days.<\/p>\n\n\n\n
Efficiency Ratios
Used to determine how well a company uses assets to generate sales and profits.<\/p>\n\n\n\n
Total Asset Turnover (TAT)
An efficiency ratio tool
Sales \/ Total Assets
Tells how many dollars in sales the company generates from every dollar of assets.<\/p>\n\n\n\n
Fixed Asset Turnover (FAT)
An efficiency ratio tool
Sales\/Fixed Assets
Calculates sales generated per dollar of fixed assets.<\/p>\n\n\n\n
Fixed assets
all non current assets<\/p>\n\n\n\n
Operating Income Return on Investment (OIROI)
An efficiency ratio tool
EBIT \/ Total Assets
the relationship between operating profit (aka EBIT) and the company’s asset base<\/p>\n\n\n\n
Financing ratios
describe in what proportions the firm uses equity and\/or debt to finance assets.<\/p>\n\n\n\n
Debt Ratio
A financing ratio
Total Liabilities \/ Total Assets
portion of the firms assets that are financed with debt<\/p>\n\n\n\n
Interest-Bearing Debt to Total Capital (IBDTC)
A financing Ratio
Interest-Bearing Debt \/ (Interest-Bearing Debt + Owners’ Equity)<\/p>\n\n\n\n
The Times Interest Earned Ratio (TIE)
A financing Ratio
EBIT \/ Interest Expense
this ratio tells us how many times a company covers (or can pay) interest expense given operating profit<\/p>\n\n\n\n
Financial Leverage Ratio (FLR)
A financing Ratio
Total Assets =1 \/ Equity<\/p>\n\n\n\n
T8 CAPM
Capital Asset Pricing Model, a linear model that relates risk and return: Re = Rf + Beta(Rm-Rf).<\/p>\n\n\n\n
T8 Cost of Equity
How much it costs a firm (in percentage terms) to use equity financing. From the investor’s perspective, it is what they require given the riskiness\/opportunity cost of the company. From the companies perspective, it is the same rate, but it is what it “costs” to attract those potential investors. It is the return they must give investors for them to invest with their company.<\/p>\n\n\n\n
T8 Diversification
The process of spreading risk across multiple assets. Decreasing risk by combining assets that are not perfectly correlated, thus spreading the risk out.<\/p>\n\n\n\n
T8 Efficient Frontier
The frontier where various portfolios have the highest ratio of return relative to risk.<\/p>\n\n\n\n
T8 Expected Return
The weighted average of security returns across different economic states, where the weights are the probabilities of the different economic states.<\/p>\n\n\n\n
T8 Idiosyncratic Risk
Firm-specific risk or the portion of risk that is diversifiable. Another name for unsystematic risk.<\/p>\n\n\n\n
T8 Systematic Risk
Market-wide risk or the portion of risk that is not diversifiable. Another word for market risk.<\/p>\n\n\n\n
T7 Fixed return securities
Another name for fixed-income securities. These are typically debt instruments, such as a bond.<\/p>\n\n\n\n
T7 Free Cash Flows
Cash that is left over after business operations and taxes are paid.<\/p>\n\n\n\n
T7 Gordon Growth Model
An economic model to compute the value of a stock assuming the stock will have constant dividend growth.
Gordon Growth Model = D1\/(r-g).<\/p>\n\n\n\n
T7 Hybrid Security
A security that has characteristics like stock and bonds – an example could be a preferred stock.<\/p>\n\n\n\n
T7 Preferred Stock
A type of equity viewed as a hybrid security because some of its characteristics are debt like (i.e., having a set dividend payment), and others are more like equity (i.e. lower claim to assets). They typically do not have voting rights, however.<\/p>\n\n\n\n
Foreign corrupt practices act 1977
Prohibits American companies from bribing foreign officials.<\/p>\n\n\n\n
FINRA
Stockbrokers ethical manner, have to be a member to sell equity to public.<\/p>\n\n\n\n
Sarbanes-Oxley act
In general, Sarbanes-Oxley raised financial standards in three main areas: corporate governance, securities analysis, and the performance of audit work.<\/p>\n\n\n\n
One of the most important goals of the Act is to ensure that company directors and officers are aware of and accountable for the financial condition of the companies they manage.<\/p>\n\n\n\n
Dodd Frank 2010
Regulate banking industry, pass yearly stress test, Wall Street reform consumer protection.<\/p>\n\n\n\n
Volcker rule
Limits how much bank and invest in a hedge fund.<\/p>\n\n\n\n
Role of SEC
Regulates companies that sell Debt and Equity to the public<\/p>\n\n\n\n
CO.S
Don’t need SEC<\/p>\n\n\n\n
Rule 144a
Dont neef SEC permision<\/p>\n\n\n\n
Secondary market
Where bought and sold from third parties like New York Stock Exchange<\/p>\n\n\n\n
Two benefits of unbundling and off shoring.
Reduces the cost in result in higher sales and employment.
Allows for sale of intermediate and final goods at lower prices and increases employment.<\/p>\n\n\n\n
Municipal bonds
What bonds are not taxed at a federal level?<\/p>\n\n\n\n
Treasury bonds
What bonds are taxed at a federal level?<\/p>\n\n\n\n
What leads to an increase in APY?
An increase in frequency of compounding<\/p>\n\n\n\n
What is one of the roles of the SEC?
It regulates public disclosures of entities that sell debt aandequity to the public<\/p>\n\n\n\n
How does credit rating impact the cost of capital?
A rating downgrade will increase the cost of capital.<\/p>\n\n\n\n
What is differential cash flow?
It is the amount of net cash flow generated a new asset in a yearly basis.<\/p>\n\n\n\n
Current asset
Converted into cash within 12 months<\/p>\n\n\n\n
Efficient frontier measure
Expected return rate for given level of risk.<\/p>\n\n\n\n
What does cash flow from investing activities measure? CFI
It measures long term assets such as building equipment and machinery.<\/p>\n\n\n\n
What are the issues with understanding foreign financial statements?
They use international financial reporting standards and they different from US accounting standards.<\/p>\n\n\n\n
What statements are required to be filed with SEC?
Annual audited financial statements.<\/p>\n\n\n\n
What are inventory related to cost?
Product cost, storage cost, & opportunity cost.<\/p>\n\n\n\n
What factors are considered for the initial outlay of a new project
The price of new equipment, shipping cost, and investment of working capital.<\/p>\n\n\n\n
What is an example of timing difference?
Companies using different fiscal years.<\/p>\n\n\n\n
What is an example of accounting difference?
Companies using different accounting methods.<\/p>\n\n\n\n
Is depreciation and salvage value on an asset precise or is it an estimate?
It is an estimate.<\/p>\n\n\n\n
What is cash flow from operating activities?
It is cash flow generated for sale of products and services.<\/p>\n\n\n\n
What is formula for retained earnings?
Ending retained earning= beginning retained earnings + net income – dividend<\/p>\n\n\n\n
Positive credit rating
Lowers cost of capital<\/p>\n\n\n\n
CAPM model
Allows to determine expected return on stocks and incorporate risk<\/p>\n\n\n\n
Market rate
Is the same as the yield to maturity YTM<\/p>\n\n\n\n
Coupon rate
The interest rate that a company promises to pay on bonds. The coupon rate of a bond is the amount of interest paid per year as a percentage of the face value or principal.<\/p>\n\n\n\n
If you own at $1,000 bond with a coupon rate of 4%, you will receive interest payments of $40 a year until the bond reaches maturity.<\/p>\n\n\n\n
Matching principle in accrual accounting requires that :
Revenues are matched to the expenses incurred to generate the revenues.<\/p>\n\n\n\n
Current assets are listed in order:
Of liquidity. Most liquid to the least liquid. (Cash, marketable securities, accounts receivables, inventory)<\/p>\n\n\n\n
EBIT is also called
Operating income!<\/p>\n\n\n\n
On an agenda income statement , interest payments are deducted before taxes are calculated.
T\/F
True<\/p>\n\n\n\n
If the price of a particular stock begins to heavily fluctuate, then the specialist will blank the spread.
Increase<\/p>\n\n\n\n
Why is NPC preferred over the IRR
It measures the dollar value and its more reliable.<\/p>\n\n\n\n
3 cost of holding inventory
Product cost
Cost of storage
Holding cost lost\/damage goods
Opportunity cost<\/p>\n\n\n\n
Discretionary financing=
Projected total assets-projected total liabilities-projected equity<\/p>\n\n\n\n
Performa income
Equity<\/p>\n\n\n\n
Income statement
How much income\/profit a company has generated that year.<\/p>\n\n\n\n
Statement of cash flow
Change in cash balance for a period of time.<\/p>\n\n\n\n
Unsystematic risk is:
aka Idiosyncratic Risk\u2026this is firm specific risk or diversifiable risk<\/p>\n\n\n\n
Idiosyncratic Risk is due to:
A firm-Specific risk\u2026management mistakes, product failures, market issues<\/p>\n\n\n\n
Volatile<\/p>\n\n\n\n
\n1 beta :airlines\/travel<\/p>\n<\/blockquote>\n\n\n\n
<1beta example
Us treasury bills, food,tylenol<\/p>\n\n\n\nROE (return on equity)
Biggest metrics managers scaled on how much did I earn as a % of each dollar investment.<\/p>\n\n\n\nROA. Return on Assets
Bottom line earnings as a percent of all the capital invested more or less comparable industries benchmarking<\/p>\n\n\n\nDiscretionary account
Non spontaneous accounts financial accounts that do not vary directly with sales.<\/p>\n\n\n\nCurrent Assets
Current assets can be easily turned into cash, because they have a lifespan of 12 months or less. These short-term assets include accounts receivable, inventory, cash, and cash equivalents. Cash equivalents are extremely safe assets, like U.S. Treasuries, that can be easily transformed into cash.<\/p>\n\n\n\nProperty Plant & Equipment (PP&E):
PP&E is often the largest line item on a firm’s balance sheet. That makes sense, considering that many companies make huge investments in things like factories, computer equipment and machinery.<\/p>\n\n\n\nNet Income
revenue – expenses<\/p>\n\n\n\nOperating Expenses
Operating expenses are costs that a company must pay in the normal course of business. A company needs to pay employees, research & develop new products, pay rent, and so on.<\/p>\n\n\n\nOperating Profit (aka EBIT)
Operating Profit = Operating Revenue – Operating Expenses. Operating profits are earned from a company’s everyday core business operations. Operating profits also are called “Earnings Before Interest and Taxes (EBIT).”<\/p>\n\n\n\nCFO
Cash Flow from Operations (CFO): CFO is the cash generated by the company’s core business activities. You want a company to generate cash from the business it operates. I<\/p>\n\n\n\nCFI
Cash Flow from Investing (CFI): Remember the Property Plant & Equipment line from the balance sheet? When a company invests in these long-lived assets (or sells them), the cash they spend buying the asset or the cash they generate from selling the asset is recorded here. If a company is growing, CFI will almost always be negative. That’s a good thing,<\/p>\n\n\n\nCFF
Cash Flow from Financing (CFF): CFF is the cash that is provided by or repaid to outside investors. If a company borrows $1 million, that is $1 million dollars that flows into the company, and CFF is positive. When the company repays the $1 million, that is a $1 million outflow of cash, and CFF is negative.<\/p>\n\n\n\nFree Cash Flow FCF
Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes.<\/p>\n\n\n\nDebentures
Debentures are bonds that are not secured by specific property or collateral. Instead, they are backed by the full faith and credit of the issuer, and bondholders have a general claim on assets that are not pledged to other debt.<\/p>\n\n\n\nForeign Bond
An example of a foreign bond is a bond issued by U.S.-based Company XYZ in Australia and denominated in Australian dollars — the home currency of the market in which the bonds are issued.<\/p>\n\n\n\nZero coupon bond
A zero-coupon bond is a bond that makes no periodic interest payments and is sold at a deep discount from face value.<\/p>\n\n\n\nEurobonds
A eurobond is a bond denominated in a currency not native to the issuer’s home country.<\/p>\n\n\n\nLet’s assume Company XYZ is headquartered in the United States. Company XYZ decides to go to Australia to issue bonds denominated in Canadian dollars.<\/p>\n\n\n\n
Beta
beta is determined by analyzing how much its return fluctuates in relation to the overall market return. A stock with a beta of 1.0 will tend to move higher and lower in lockstep with the overall market. Stocks with a beta greater than 1.0 tend to be more volatile than the market, and those with betas below 1.0 tend to be less volatile than the underlying index. Stocks with betas of zero generally move independently of the broader market. And finally, stocks with negative betas tend to move in the opposite direction relative to the broader market. When the S&P tumbles, stocks with negative betas will move higher, and vice versa.<\/p>\n\n\n\nFor example, a stock with a beta of 2.0 is usually twice as volatile as the broader market. If the S&P 500 were to fall by -10% next year, then the stock would be expected to fall about -20%<\/p>\n\n\n\n
Retained Earnings
Retained earnings are the sum of a company’s profits, after dividend payments, since the company’s inception.<\/p>\n\n\n\nIRR
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.<\/p>\n\n\n\nInternal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.<\/p>\n\n\n\n
weighted average
Weighted average refers to the mathematical practice of adjusting the components of an average to reflect the importance of certain characteristics.<\/p>\n\n\n\nThink of House of Representatives<\/p>\n\n\n\n
Weighted average cost of capital (WACC)
is the average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company’s target capital structure.<\/p>\n\n\n\nAn example: Corporation ABC’s weighted average cost of capital is 4.9%.<\/p>\n\n\n\n
This means for every $1 Corporation ABC raises from investors, it must pay its investors almost $0.05 in return.<\/p>\n\n\n\n
Why does WACC matter when evaluating a company?
The lower a company’s WACC, the cheaper it is for a company to fund new projects.<\/p>\n\n\n\nA company looking to lower its WACC may decide to increase its use of cheaper financing sources. For instance, Corporation ABC may issue more bonds instead of stock because it can get the financing more cheaply. Because this would increase the proportion of debt to equity, and because the debt is cheaper than the equity, the company’s weighted average cost of capital would decrease.<\/p>\n\n\n\n
Cost of Equity (aka rate of return) is calculated by:
The cost of equity is the rate of return required to persuade an investor to make a given equity investment.<\/p>\n\n\n\nUse a rearranged Gordon Growth Model:<\/p>\n\n\n\n
Cost of Equity = (Next Year’s Annual Dividend \/ Current Stock Price) + Dividend Growth Rate<\/p>\n\n\n\n
R = (D1\/V0) + g<\/p>\n\n\n\n
Let’s assume the following for Company XYZ:
Next year’s dividend: $1
Current stock price: $10
Dividend growth rate: 3%
rf: 3%
Ba: 1.0
rm: 12%<\/p>\n\n\n\nUsing the dividend growth model, we can calculate that Company XYZ’s cost of capital is ($1 \/ $10 ) + 3% = 13%<\/p>\n\n\n\n
Weighted average cost of capital (WACC) formula:
WACC = ((E\/V) Re) + [((D\/V) Rd)*(1-T)]<\/p>\n\n\n\nE = Market value of the company’s equity
D = Market value of the company’s debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate<\/p>\n\n\n\nA company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source than another, we calculate a weighted average to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, and inventory.<\/p>\n\n\n\n
Capital Asset Pricing Model (CAPM) formula to determine Cost of Equity (aka rate of return required)
Capital Asset Pricing Model (CAPM):<\/p>\n\n\n\nra = rf + Ba (rm-rf)<\/p>\n\n\n\n
where:
rf = the rate of return on risk-free securities (typically Treasuries)<\/p>\n\n\n\nBa = the beta of the investment in question<\/p>\n\n\n\n
rm = the market’s overall expected rate of return<\/p>\n\n\n\n
Let’s assume the following for Company XYZ:<\/p>\n\n\n\n
Next year’s dividend: $1
Current stock price: $10
Dividend growth rate: 3%
rf: 3%
Ba: 1.0
rm: 12%<\/p>\n\n\n\nUsing CAPM, we can calculate that Company XYZ’s cost of capital is
3% + 1.0*(12% – 3%) = 12%<\/p>\n\n\n\nDisadvantages to Gordon Growth Model
The dividend growth model is does not apply to companies that don’t pay dividends, and it assumes that dividends grow at a constant rate over time. The dividend growth model does not explicitly consider the risk of the investment.<\/p>\n\n\n\nBeta: how much a stock return fluctuates in relation to the overall market return. (Usually S&P 500 Index)
Try to have stocks with different beta’s in order to diversify risk within your portfolio<\/p>\n\n\n\nBETA OF ONE IS BASELINE. A stock with a beta of 1.0 will tend to move in lockstep with the market. (ie S&P 500 Index Fund)<\/p>\n\n\n\n
Stocks with a beta > 1.0 tend to be more volatile than the market (tech companies)<\/p>\n\n\n\n
Stocks with betas 0 – 1.0 tend to be less volatile than the market. (utility companies, Duke Energy)<\/p>\n\n\n\n
Stocks with betas = 0 move independently of the market. (Cash)<\/p>\n\n\n\n
Stocks with negative betas tend to move in the opposite direction relative to the broader market. When the S&P tumbles, stocks with negative betas will move higher. (Uncommon, but ie Gold and Gold stocks)<\/p>\n\n\n\n
Risk Return Tradeoff
The risk\/return tradeoff is the balance between the desire for the lowest possible risk and the highest possible return. This is demonstrated graphically in the chart below. A higher standard deviation means a higher risk and higher possible return.<\/p>\n\n\n\nThe risk\/return tradeoff tells us that the higher risk gives us the possibility of higher returns. There are no guarantees. Just as risk means higher potential returns, it also means higher potential losses<\/p>\n\n\n\n
CAPM explained: Use this model to price risky securities
The capital asset pricing model (CAPM) describes the relationship between risk and expected return<\/p>\n\n\n\nCAPM says that the expected return of a security equals the rate on a risk-free security plus a risk premium.<\/p>\n\n\n\n
If this expected return does not meet or beat our required return, the investment should not be undertaken.<\/p>\n\n\n\n
How to use Beta to calculate CAPM:
Required Return = RF Rate + (Market Return – RF Rate) x Beta<\/p>\n\n\n\nFor example, let’s say that the current risk free-rate is 5%, and the S&P 500 is expected to return to 12% next year. You are interested in determining the return that AAPL will have next year. You have determined that its beta value is 1.9. The overall stock market has a beta of 1.0, so AAPL’s beta of 1.9 tells us that it carries more risk than the overall market; this extra risk means that we should expect a higher potential return than the 12% of the S&P 500.<\/p>\n\n\n\n
Required Return = 5% + (12% – 5%) x 1.9
Required Return = 18.3%<\/p>\n\n\n\nOnly buy the stock if you think AAPL will have a return > 18.3%<\/p>\n\n\n\n
Common Size Income Statement
A simple vertical analysis (common size income statement) – dividing all the individual income and expense amounts by the sales amount – provides profit margin and expense percentages (ratios) for the whole income statement. Looked at over a period of five years, an investor will have a clear idea of the consistency and\/or positive\/negative trends in a company’s management of its income and expenses.<\/p>\n\n\n\nProfit Margin Ratios
The term margin is used to express the comparison of four important levels of profit in the income statement – gross, operating, pretax and net – to sales.<\/p>\n\n\n\nAside from monitoring a company’s historical profit performance, these profit margins (ratios) also can be used to compare a company’s profitability metrics to those of its direct competitors, industry figures and the general market.<\/p>\n\n\n\n
ROE Return on Equity
ROE measures the profits being generated on the shareholders’ investment.
Expressed as a percentage, the ROE ratio is calculated by dividing net income (income statement) by the average of shareholders’ equity (balance sheet).<\/p>\n\n\n\nAs a rule of thumb, ROE ratios of 15% or more are considered favorable.<\/p>\n\n\n\n
inventory turnover ratio
Measures Efficiency
Also measures how quickly the company is moving merchandise through the warehouse to customers.<\/p>\n\n\n\nInventory Days = 365 Days \/ (Average Cost of Goods Sold\/Average Inventory)<\/p>\n\n\n\n
Obtaining Average COGS
To get the necessary data, find its Consolidated Statements of Income on the company’s website and locate cost of goods sold (COGS), or “cost of sales” found just below the top-line sales (revenue).<\/p>\n\n\n\nFor the 2011 fiscal year, Walmart’s COGS totaled US$315.29 billion.<\/p>\n\n\n\n
Obtaining Average Inventory :
Then look at the Balance Sheet . Under assets, you will find the inventory figure. For 2011, Walmart’s inventory was $36.3 billion, and in 2010, it was $32.7 billion.
Average the two numbers ($36.3 billion + $32.7 billion \/ 2 = $34.5 billion), then divide that inventory average, $34.5 billion, into the average cost of goods sold in 2011.<\/p>\n\n\n\nYou will arrive at the annual Inventory turnover ratio 9.1.<\/p>\n\n\n\n
Now, divide the number of days in the year, 365, by the annual turnover ratio, 9.1, and that gives you 40.1.<\/p>\n\n\n\n
That means it takes Walmart about 40 days, or about a month and a half, to cycle through its inventory.<\/p>\n\n\n\n
Accounts Receivable Turnover Ratio
investors should determine how many days, on average, the company takes to collect its accounts receivable.<\/p>\n\n\n\nReceivables Days = 365 Days \/ (Revenues\/Average Receivables)<\/p>\n\n\n\n
On the top of the Income Statement, you will find revenues. On the Balance Sheet under current assets, you will find accounts receivable.<\/p>\n\n\n\n
Walmart generated $418.9 billion in net sales in 2011. At the end of that year, its accounts receivable stood at $5 billion, and in 2010, it was $4 billion, yielding an average accounts receivable figure of about $7 billion.<\/p>\n\n\n\n
Dividing revenue by average receivables gives a receivables turnover ratio of 60.<\/p>\n\n\n\n
This shows how many times the company turned over its receivables in the annual period.<\/p>\n\n\n\n
365 days of the year divided by the receivables turnover ratio of 60 gives a receivables turnover rate of three days.<\/p>\n\n\n\n
On average, it took about a week for Walmart to receive payment for the goods it sold.<\/p>\n\n\n\n
Liquidity Ratios<\/p>\n\n\n\n
Forecast Probability (Expected Return)
Assume an investment manager has created a portfolio with Stock A and Stock B.
Stock A has an expected return of 20% and a weight of 30% in the portfolio. Stock B has an expected return of 15% and a weight of 70%. What is the expected return of the portfolio?<\/p>\n\n\n\nE(R) = (0.30)(0.20) + (0.70)(0.15)
= 6% + 10.5% = 16.5%<\/p>\n\n\n\nThe expected return of the portfolio is 16.5%.<\/p>\n\n\n\n
Trading on the NYSE is executed without a specialist (i.e. a market maker). True or False?
False<\/p>\n\n\n\nStocks and Bonds are two types of financial instruments. True or False?
True<\/p>\n\n\n\nWhen revenue is matched with cost of sales in an Income statement it is called?
Matching principle<\/p>\n\n\n\nBasic balance sheet equation is what?
Equity = Assets – Liabilities<\/p>\n\n\n\nWhy is the balance sheet known as the permanent statement?
Because the other statements are reset at the end of the fiscal year.<\/p>\n\n\n\nHow do you calculate the change in retained earnings?
Net income-dividends<\/p>\n\n\n\nSales – Cost of Sales – other expenses =
Operating Income or EBiT<\/p>\n\n\n\nName four accounts that are part of total assets?
Cash, Accounts receivable, inventory, long term assets<\/p>\n\n\n\nName three accounts that are part of total liabilities?
Bonds, accounts payable and mortgage<\/p>\n\n\n\nName four accounts that are part of current assets?
Inventory, cash, accounts receivable and short term investments.<\/p>\n\n\n\nName three accounts that are only included in cash flow from financing?
Common stock, dividends paid and bonds payable<\/p>\n\n\n\nDefine the statement of cash flows?
Calculated for the same period of time as the incomes statement is calculated based on the income statement and changes in the balance sheet is one of the three basic accounting statements.<\/p>\n\n\n\nWhen fixed assets increase what happens to cash?
Cash will decrease<\/p>\n\n\n\nWhat is the purpose of the statement of cash flows?
Explains the change in cash over the course of the specified time frame.<\/p>\n\n\n\nSuppose the inventory turnover of a company is higher than the industry. Based on this observation, which of the following is most likely?
The firm has too little inventory resulting in lost sales or stock-outs.<\/p>\n\n\n\nIf a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio?
Higher<\/p>\n\n\n\nThe Operating Income Return on Investment (OIROI) uses what elements on the income statement?
EBIT and total assets<\/p>\n\n\n\nWhy would a company be interested in the Total Asset Turnover (TAT) ratio?
To see how efficient are at producing sales<\/p>\n\n\n\nWhat annual interest will be paid for a zero coupon bond?
0%<\/p>\n\n\n\nWhat is the most significant characteristic of subordinated debt?
Senior debt is paid off first<\/p>\n\n\n\nIf a company wants to increase its debt capital, how will they raise the funds?
Sell bonds<\/p>\n\n\n\nWhat is the lowest level investment bond
BBB<\/p>\n\n\n\nWhat can cause the bond price to fluctuate?
A change in the bond rating, a change in the financial condition, general change in interest rates.<\/p>\n\n\n\nWhat does a company use as security for a bond?
Credit worthiness<\/p>\n\n\n\nUnder the efficient market hypothesis, what will companies endeavor to do?
Maximize profits for a given level of risk<\/p>\n\n\n\nWhat does the beta coefficient represent?
It is a statistically derived measure of volatility.<\/p>\n\n\n\nIf an investor knows the idiosyncratic risk, the investor knows the?
Beta Coefficient<\/p>\n\n\n\nWhy is the depreciation expense taken out of the net income calculation, yet added back at the end?
Because depreciation expense is tax deductible.<\/p>\n\n\n\nWhy would we reject a project based on NPV?
The NPV is a negative number<\/p>\n\n\n\nWhy would we reject a project based on IRR?
The discount rate is higher than the IRR<\/p>\n\n\n\nWhat are two key elements of differential cash flow?
Depreciation expense and net income<\/p>\n\n\n\nWhy is the NPV preferred over the IRR?
It measures the dollar value and is more reliable.<\/p>\n\n\n\nWhen a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability?
Higher leverage leads to higher profitability for a given sale level.<\/p>\n\n\n\nWhat does the degree of financial leverage indicate?
The reliance on debt<\/p>\n\n\n\nIf a company has a high degree of financial leverage, what does that tell us about the firms risk profile?
Financial leverage also means that more financing is done through debt, not equity. Higher profits to shareholders.<\/p>\n\n\n\nWhat is the cash cycle?
The amount of time to regenerate cash.<\/p>\n\n\n\nWhy is float important to understand?
To time cash expenditures<\/p>\n\n\n\nWhat should a company do to manage its working capital?
Collect quickly and pay slowly<\/p>\n\n\n\nName what characterizes increased collection float?
Increased float indicates slower processing time.<\/p>\n\n\n\nIn regards to Accounts Payable Balances, what is a good policy?
Paying off A\/P on the last day due is a good policy.<\/p>\n\n\n\nWhat would be a good source of information to determine replacement cost?
Building Appraisal<\/p>\n\n\n\nDodd-Frank Act regulates which segment of the U.S economy?
Banking industry<\/p>\n\n\n\nWhat is the regulatory body that overseas the systematic risk in banking?
Financial stability oversight council<\/p>\n\n\n\nThe SEC securities and Exchange Commission requires companies to do the following three things:
Register all public offerings, regulate stock sales and ensure transparency through uniform reporting.<\/p>\n\n\n\nWhat does the Sarbanes-Oxley Act require companies to do?
Have internal control audits, senior management responsible for signing off on statements and places restrictions on auditors.<\/p>\n\n\n\nFinancial Industry Regulatory Authority (FINRA) does the following?
Licenses stock brokers and audits brokerage firms.<\/p>\n\n\n\nIf a product is made 100% domestically, what can affect its domestic market?
International competition<\/p>\n\n\n\nIf a company makes a product in a foreign country where labor costs are much lower, what happens?
Profits go up and domestic employment decreases.<\/p>\n\n\n\nIf the value of a dollar increases, the price of imports does what?
Decreases<\/p>\n\n\n\nWhy would a farmer buy a hedge when he signs a contract to sell products oversees?
To reduce currency risk<\/p>\n\n\n\nThe goal of a corporation is to?
Minimize risk<\/p>\n\n\n\nWhich of the following is not a requirement for an efficient market?
Liquidity<\/p>\n\n\n\nThe value of money depends upon?
The timing of receipts, certainty of receipt and riskiness of receipt.<\/p>\n\n\n\nWhat is the purpose of the SEC 10-K filing?
Prevent monopolies<\/p>\n\n\n\nWhich line item is not part of net working capital?
Bonds<\/p>\n\n\n\nIncrease in accounts payable, decrease in accounts payable and increase in inventory are examples of cash flow. True\/False
False<\/p>\n\n\n\nNet margin is defined as?
Retained earnings \/ sales<\/p>\n\n\n\nWhich item is transferred from the income statement to the balance sheet?
Depreciation expense and addition to retained earnings<\/p>\n\n\n\nWhat item is added to net income to calculate net cash flow?
Depreciation expense<\/p>\n\n\n\nWhich cash flow statement represents cash earned by producing and selling the product?
Cash flow operations<\/p>\n\n\n\nWhich ratio reflects a firms reliance on debt financing?
Financial leverage<\/p>\n\n\n\nWhich action causes a cash outflow?
Increase in inventory<\/p>\n\n\n\nIf two firm use different money valuation methods, it is called?
Accounting Difference<\/p>\n\n\n\nWhat thee things affect the required return on a security?
Perceived riskiness
Financial decisions of the firm
Trading in financial markets<\/p>\n\n\n\nWhich is the most frequent type of transaction in financial markets?
Secondary markets<\/p>\n\n\n\nWhich of the 5 white financial function keys represents a series of cash disbursements?
PMT<\/p>\n\n\n\nIf payments are made semi-annually, which key inputs must be adjusted?
PMT, I\/Y and N<\/p>\n\n\n\nWhich can be defined as change in value of cash over time?
Interest rate, inflation rate, and discount rate<\/p>\n\n\n\nWhich signifies a need to change the calculator to begin mode?
Recurring payments made at the beginning of the year.<\/p>\n\n\n\nWhy is an annuity due more valuable than an ordinary annuity?
Payment are received earlier<\/p>\n\n\n\nWhich is always larger?
Future value<\/p>\n\n\n\nIf you wanted to create an annuity with annual adjustments for inflation, you would use:
Perpetual growth annuity<\/p>\n\n\n\nWhich ratio will always be smaller?
Net margin<\/p>\n\n\n\nIf net working capital increases, it causes?
A cash outflow<\/p>\n\n\n\nWhat feature distinguishes bonds from stocks?
Periodic cash payments must be made to investors and capital gains can be realized by investors.<\/p>\n\n\n\nYield on a bond can best be described as?
Rate of increase in value if investment<\/p>\n\n\n\nWhen is the bond yield equal to the coupon rate?
At pr price<\/p>\n\n\n\nFor a semi annual pay bond, which inputs must be adjusted?
N, I\/Y and PMT<\/p>\n\n\n\nWhich describes the relationship between price and yield?
Price increases cause yield decreases<\/p>\n\n\n\nWhich does not affect a bonds required yield?
Expected growth rate<\/p>\n\n\n\nA bonds duration causes?
Market risk<\/p>\n\n\n\nIf a bonds price is at a discount, then?
Bond yield is more than the coupon rate<\/p>\n\n\n\nWhat is the difference between common and preferred stock?
Preferred stock dividends are fixed<\/p>\n\n\n\nIf rating agencies downgrade a bond from AAA to BBB, what happens?
The bonds price decreases<\/p>\n\n\n\nWhat are the two sources of profit to an investor?
Dividends and capital gains<\/p>\n\n\n\nWhich best describes the market risk premium?
Excess return over risk free rate<\/p>\n\n\n\nWhat best describes beta?
Stock price volatility relative to market feasibility<\/p>\n\n\n\nWhich is not a means of eliminating idiosyncratic risk?
Buy a low beta stock<\/p>\n\n\n\nThe required return on stocks is derived from?
Systematic risk<\/p>\n\n\n\nA prudent investor would seek?
Maximize return for investor’s risk tolerance<\/p>\n\n\n\nA stock whose return is affected substantially by a recession is?
High beta stock<\/p>\n\n\n\nWhich factor does not affect WACC?
Efficiency ratio<\/p>\n\n\n\nWhich factor does not impact a stocks price?
Maturity date<\/p>\n\n\n\nIf the firm believes that the market under-values its stock, it should?
Buy back stock<\/p>\n\n\n\nA firm is a good investment if?
It’s price is less than intrinsic value<\/p>\n\n\n\nWhy does a firm calculate WACC?
It is the cost of financing the firm<\/p>\n\n\n\nWhich is a difference between stocks and bonds?
Increased required return always reduces price<\/p>\n\n\n\nWhich is the correct order in terms of lowest to highest required return?
Secured bonds, preferred stock, common stock<\/p>\n\n\n\nWhich measures sales growth that can be financed internally?
SGR<\/p>\n\n\n\nWhy are accurate sales forecast desirable?
To plan resource acquisition<\/p>\n\n\n\nWhat components of ICF are included in Gross PPE?
Cost of asset, shipping & installation installment<\/p>\n\n\n\nIf an equipment salvage value is greater than book value?
There is a tax cash outflow<\/p>\n\n\n\nA potential project should be adopted if?
IRR is greater than WACC<\/p>\n\n\n\nA firm will have volatile profits if?
It has high operating leverage, high financial leverage and high combined cash leverage.<\/p>\n\n\n\nWhich firm is more likely to use high financial leverage?
Firm with stable sales and manual production<\/p>\n\n\n\nExcess leverage will likely result in?
Increased WACC and reduced stock price<\/p>\n\n\n\nWhy might a firm by back stock?
Increase leverage and boost the stock price<\/p>\n\n\n\nWhich ratio might be used in working capital management?
Quick ratio<\/p>\n\n\n\nHow might a firm incentivize customers to pay sooner?
Larger discount<\/p>\n\n\n\nWhich ratio is used to value a private firm?
PE<\/p>\n\n\n\nThe SEC regulates financial markets to achieve what goal?
Protect investors, increase transparency and increase market efficiency.<\/p>\n\n\n\nThe Accredited Investor designation is used for?
Rule 144A and Hedge Funds<\/p>\n\n\n\nFX hedging is used to?
Promote exports<\/p>\n\n\n\nA strong dollar has what effect?
Increases imports<\/p>\n\n\n\nRelatively high interest rates in the U.S has what effect?
Strong dollar<\/p>\n\n\n\nIf a firms combined leverage is high, what is the implication?
Profits are more volatile as sales fluctuate<\/p>\n\n\n\nWhy would a company buy back outstanding stock?
To boost the price of stock, increase financial leverage and lack of investment opportunities.<\/p>\n\n\n\nWhich can beat be described as a present value problem.
Valuation of bonds, valuation of stock and evaluation of potential investment.<\/p>\n\n\n\nWhat attributes of cash should be considered in evaluating investments?
Size of cash flow, timing of cash flow and risk of cash flow.<\/p>\n\n\n\nFirms use sensitivity analysis because?
To anticipate impact of erroneous forecasts<\/p>\n\n\n\nIf IRR is greater than WACC and adopted project?
Increases shareholder value<\/p>\n\n\n\nIf a firm increases leverage?
Indeterminate impact on price<\/p>\n\n\n\nRole of the Federal Reserve Act of 1913
Federal regulation to deal with bank runs and recessions<\/p>\n\n\n\nRole of McFadden Act of 1927?
Federal regulation designed to provide greater accessibility for bank customers<\/p>\n\n\n\nRole of Glass-Steagall Banking Act 1933?
Federal Regulation to curb bank failures by separating commercial\/ consumer banks from investment banks<\/p>\n\n\n\nGarn-St. Germain Act of 1982?
Loosened restrictions on what financial institutions could do to the U.S with regard to products they could offer.<\/p>\n\n\n\nRole of Dodd Frank Act 2010?
Federal regulation to regain control of financial institutions by the federal government after the 2008 meltdown.<\/p>\n\n\n\nRole of Securities Act of 1933?
Resulted from Great Depression. Required firms to register with the SEC to sell public securities.<\/p>\n\n\n\nRole of Securities Act of 1933 Rule 144A?
A safe harbor by the SEC to sell private capital to accredited investors.<\/p>\n\n\n\nRoles of Sarbanes Oxley Act of 2002?
Federal regulations resulting from corporate frauds such as Enron and designed to protect investors from fraud.<\/p>\n\n\n\nRole of the Financial Industry Regulatory Authority (FINRA)?
It is a private regulatory corporation<\/p>\n\n\n\nWhat specific legislation permits companies to sell stock without registration?
Rule 144A<\/p>\n\n\n\nWhat Act controls IPO’s?
Securities act of 1933<\/p>\n\n\n\nWhich act re-regulated the banking industry?
Dodd Frank Act<\/p>\n\n\n\nWhat is EDGAR?
Electronic Data Gathering Analysis and Retrieval System<\/p>\n\n\n\nWhich Act monitors markets systemic risk?
Dodd Frank Act<\/p>\n\n\n\nWhat organization was created to bring structure to investment offerings?
The Securities and Exchange Commission (SEC)<\/p>\n\n\n\nWhich Act brought wild bankers under control?
National Banking Act of 1863<\/p>\n\n\n\nWhich Act set up a division between consumer banking and commercial banking?
Glass Stegall Banking Act of 1933<\/p>\n\n\n\nWhich Act was created to support the banking system and was intended to keep small banks from failing?
Glass Stegall Banking Act of 1933<\/p>\n\n\n\nWhich Act was created to improve internal control practices at corporations and increase the role of public accountants in doing so?
Sarbanes Oxley Act<\/p>\n\n\n\nWhat organization was created to provide self policing in the investment industry?
Securities and Exchange Commission<\/p>\n","protected":false},"excerpt":{"rendered":"WGU C214 OA Financial Management RetakeExamQuestions and Answers (2022\/2023)(Verified Answers) Change in PPE 1,000Change on long termliabilities600Dividends paid 100What is the firm\u2019s cash flow from financing activities? CFFIncrease in debt 600 + (no change in stock) 0 \u2013 (dividends paid) 100 = 500 Characteristics of preferred stock includes-dividends in arrears-dividends are cumulative-higher payoff claim in […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-114776","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/114776","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=114776"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/114776\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=114776"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=114776"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=114776"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}