C214 - Financial Management Study Guide - WGU

C214 - Financial Management Study Guide - WGU

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Students also studied Terms in this set (98) Western Governors UniversityC 214 Save WGU C214 Concepts Only Multi Cho...Teacher 222 terms Lydia_Smith75 Preview WGU C214 Concepts Only Multi Cho...222 terms ctcaw259Preview WGU C211 - Global Economics for M...136 terms jasonmcnearPreview Pre-Ass 57 terms stol HedgingThe process of eliminating risk TariffsTaxes levied on goods imported into a country Foreign Exchange Risk (AKA FX Risk)Risks associated with the changing values of countries' concurrences Direct QuoteIf you are located in the United States, a direct quote is one where the foreign currency is in the denominator of the quote. EUR/USD = €1.11 Indirect QuoteWhen a currency exchange rate is started with the currency of interest in the denominator. USD/EUR = $0.901 Floating Exchange RateIf a country follows a floating exchange rate policy, the value of the currency is determined strictly by supply and demand in the open market.Fixed (Pegged) Exchange RateA country's monetary authority (e.g., the Bank of England for the UK) intervenes to maintain a constant value of the country's currency.Managed (Dirty Floating) Exchange RateCurrencies are generally allowed to float but the fluctuations are managed. A managed float is essentially a policy of allowing a currency to float within a minimum and maximum value.The two primary methods used to hedge FX risk are: Financial derivatives and direct investment.Financial DerivativesTo use a derivative contract also known as a Currency Forward.

Currency ForwardAn agreement for delayed delivery.Direct InvestmentA direct investment strategy requires a firm build infrastructure in the country where sales occur. It's very straight forward.FX HedgingAllows firms to focus on making profits through their operations and not trying to guess which direction FX rates will move.TariffsThe motivation for tariffs is the protection of domestic industries.Currency RestrictionsThe idea is to limit the ability of a foreign firm to take capital out of a country.FASB (Financial Accounting Standards Board)The U.S. accounting system is governed by the Financial Accounting Standards Board (FASB), which is a private non-profit organization that attempts to establish and regulate the generally accepted accounting principles of firms.OutsourcingTo produce a product or service outside of the country.Outsourcing DisadvantageA potential disadvantage to this type of outsourcing is that manufacturing jobs have dried up in the U.S.CapitalA financial asset the can be used by a firm. An example of capital may be cash held by a firm or machinery.EquityOwnership in an asset such as a company. Often another name for stock.Capital BudgetingIs the planning of a firm's long-term investments.Corporate FinanceThe decision making by a firm's management.Stocks & BondsAre two types of financial instruments.Treasury SecuritiesBonds that are issued by the U.S government to raise capital.Corporate BondsA debt instrument this is issued by a corporation in order to raise capital.A bond is similar to a loan?True Market EfficiencyThe degree to which prices in a market reflect all available information.Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the percentage return for this stock?(47.42-45)/45 = 0.0538 or 5.38% Suppose you bought a stock for $22.10 one year ago.Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the percentage return for this stock?(22.08-22.10 + 4)/22.10 = 0.1801 or 18.01%

What is the goal of a firm?To maximize shareholder value What is a way firms can maximize shareholder value? Invest in new machinery that will be profitable.What are ways firms can maximize shareholder value? Hire new employees to improve production and the profitability.Agency costsAre defined as costs that are incurred when management does not act in the best interests of shareholders.What issue(s) are associated with the firm goal to maximize shareholder value?Agency costs and potential unethical behavior Which of the following is a reason for the difference between CFO and net income?Net income includes gains and losses from the sale of assets Revenue is not equal to cash collected Net income includes non-cash expenses Cash Flow from Operating ActivitiesNet Income + Non-Cash Expenses + Decrease in Operating Asset Accounts - Increase in Operating Asset Accounts + Increase in Operating Liability Accounts = Decrease in Operating Liability Accounts CFONotes Payable does not make a difference Which of the following best describes the simplified calculation of CFO?CFO is calculated for a single period, so we need depreciation expense for that period and not total accumulated depreciation. Additionally, while changes in accounts receivable are included in the calculation of CFO we need to examine all operating accounts not just this one.CFOIncreases in an operating asset account imply an outflow of cash. For assets to increase, cash must have been used to acquire the asset CFOIncreases in liability accounts signal an inflow of cash; decreases signify an outflow of cash.CFOIncreases = an outflow of cash Decreases = an inflow of cash CFOOperating liability accounts (e.g., accounts payable and accrued wages) are Increases = an inflow of cash Decreases = an outflow of cash An increase in inventory will increase CFO.True Cash is an asset, but is not considered in the calculation of CFO True CFI (Cash Flow from Investing)20X2 20X1 Net PP&E $1,300 $1,100

=($1,300−$1,100)+$250

Last year a firm recorded Net PP&E of $4,600 while this year the same firm recorded Net PP&E of $4,500. If the depreciation expense for last year and this year are $500 and $800 respectively, what is the CFI of the company?(assume no asset disposals) Solution: CFI = (Change in Net PP&E + Depreciation Exp) = (4500 - 4600 + 800) = $700 A firm recorded Gross PP&E of $5,000 in 20x1 and $6,300 in 20x2. Further, accumulated depreciation was $2,000 and $2,400 in 20x1 and 20x2, respectively. Assuming no asset disposals, CFI is closest to which of the following?

Solution: CFI = Change in Gross PP&E = 6300 - 5000 = $1,300.

How to find dividends (CFF)Dividends=(Old RE+Net Income)−New RE Net Income = $1,000 Beginning RE = $12,200 Ending RE = $13,000 How much did the firm pay in dividends? Using our formula, we get Dividends=($12,200+$1,000)−$13,000=$200 U&I Inc. recorded retained earnings of $2,000 last year and $2,500 this year. Net income of U&I Inc. is $500 and $650 for last year and this year, respectively. This year,

U&I Inc. must have paid dividends of:

(2500 + 650) - 2000 = 150

FCFThat is, FCF represents the cash that can be distributed after funding required reinvestment in PP&E as well as increased working capital.FCFE & FCFFFCF comes in two flavors: FCF to the firm (FCFF) and to equity (FCFE). FCFF is 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. FCFE is the cash distributable to the equity holders after satisfying all obligations to debt holders.FCFFFCFF=EBIT(1−tax rate)+Depreciation−CAPEX−Increases in NWC Where Tax rate = percent of earnings a firm pays in tax Depreciation = Depreciation expense EBIT = Earnings before interest and taxes CAPEX = Capital expenditure on PP&E; frequently measured as CFI NWC = Net working capital (current assets − current liabilities) changes FCFEFCFE=NI+Depreciation−CAPEX−Increases in NWC+Increases in Debt where Increases in debt = new borrowings minus any repayment of old debt