WGU C214 OA Q&A 2023

Which will be larger: accrual taxes payable or accounting income tax expense - Correct answer-Accounting tax expense will be higher; actual taxes based on IRS rules will be lower Which financial ratios measure "efficiency"? - Correct answer-Asset turnover and Fixed Asset turnover Which ratio is the best measure of a firm's ability to pay bills? - Correct answer-Quick Ratio Which decision requires using subjective estimates? - Correct answer-Economic life of a new asset What is the yield to maturity on a bond? - Correct answer-The return earned from the purchase date to maturity If a firm buys a 30-day CD, where is it carried on the balance sheet? - Correct answerCash and ST in current assets How does a "prudent investor" select investments? - Correct answer-Seeks the highest return for "reasonable" amount of risk What is the difference between WACC and CAPM's required return? - Correct answerCAPM includes only equity required return; WACC includes debt and equity What do points on the Efficient Frontier measure? - Correct answer-The maximum return for a given level of risk; maximum Return-to-risk ratio What is Beta? - Correct answer-Measure of volatility of a stock's risk relative to the market Why are accurate forecasts important? - Correct answer-Plan for resources to support sales Which leverage measure shows the impact of EBIT changes on pre-tax profit (EBT)? - Correct answer-Financial leverage Which ratios are used in working capital management? - Correct answer-Cash ratio, Current ratio - ratios containing current assets and/or current liabilities Which ratio is used for valuing a private company? - Correct answer-Price-to-earnings (PE) ratio What are the 4 costs associated with holding inventory? - Correct answer-Product, storage, holding, and opportunity What risk is eliminated by a diversified portfolio? - Correct answer-Idiosyncratic risk - risk affecting a single firm What is the "secondary" market? - Correct answer-Investors trading securities among themselves after initial issuance of securities What are impacts of outsourcing? - Correct answer-Fewer jobs and lower priced products What are the impacts of tariffs? - Correct answer-Protects inefficient firms and employees; higher product costs for consumers Which item is transferred from the income statement to the balance sheet? - Correct answer-Depreciation expense If two companies use different inventory valuation methods, what is this called? - Correct answer-An "accounting difference" What securities are exempt from federal income taxation? - Correct answer-Municipal bonds Why would a firm prefer to issue debt rather than stock? - Correct answer-Deb has a lower required return; debt interest is tax deductible; avoids dilution of ownership What happens to APY as the number of interest payment periods per year increase? - Correct answer-APY increases What is the present value of future cash flows of a stock called? - Correct answerIntrinsic Value If market price is greater than intrinsic value, should you buy or sell? - Correct answerSell In event of bankruptcy, what is the order of claims settlement? - Correct answerSecured debt, senior debt, subordinated debt, preferred stock, common stock What is a spontaneous account? - Correct answer-One that changes with the level of sales - current assets & liabilities What is a discretionary account? - Correct answer-One that changes due to the management decision- bonds outstanding If the financial ratios of 2 firms are compared, what is it called? - Correct answer-Crosssectional analysis How can a firm encourage customers to pay early? - Correct answer-"Discounts" for early payment If a loan does not require collateral, what is it called? - Correct answer-Unsecured loan What transaction do firms use to offset foreign exchange risk? - Correct answerHedging If the debt ratio increases, what is the likely impact on ROE? - Correct answer-It increases Why is an Annuity Due more valuable than an Ordinary Annuity? - Correct answer-Cash payments are received earlier - beginning of the year rather than end of the year What discount rate is used to calculate net present value in capital budgeting? - Correct answer-Weighted Average Cost of Capital (WACC) or the "required return" What financial structure causes profitability to be more volatile? - Correct answerLeverage If debt is cheaper than equity, why not all debt? - Correct answer-Bankruptcy; equity is the cushion against bankruptcy The Degree of Financial Leverage reflects what? - Correct answer-Firm's reliance on debt What is a leveraged buyout? - Correct answer-A firm issues debt to buy another firm If interest rates increase, what is the impact on WACC? - Correct answer-Required returns on both debt and equity increase - therefore WACC increases Why is the required return on stocks higher than bonds? - Correct answer-Higher risk The DuPont formula expands the ROE definition into what 3 ratios? - Correct answerNet Margin, Total Asset Turnover, and Financial Leverage What cash balance supports daily operations, that is, spontaneous accounts? - Correct answer-Operating balance, as opposed to Reserve balance Which cash flow statement reflects the daily operations of the firm? - Correct answerCash flow operations What type of debt has lower claim than bonds in bankruptcy proceedings? - Correct answer-Subordinated debentures, e.g. subordinated debt In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? - Correct answer-Aversion to realizing losses; prefer to gamble on recovery More recent research on Modigliani-Miller Theorem (MM) shows what? - Correct answer-The debt-equity ratio does affect the WACC and the value of the firm The Prospectus contains what information? - Correct answer-Audited financials, description of security being issued, & risk factors for investor If ROE is greater than ROA, why does that occur? - Correct answer-The firm has debt (e.g. bonds) on the balance sheet What is APY for a savings account paying 6% APR on daily compounding? - Correct answer-(1 + .06/365) ^ 365 = 1.0618 - 1 = .0618 What is the purpose of the Securities and Exchange Commission (SEC)? - Correct answer-To ensure that US public companies are transparent to support efficient markets Why would totally domestic firms worry about global finance? - Correct answerCompetition from foreign firm imports to US If a firm automates its production line, what ratio increases? - Correct answer-Fixed Asset Turnover What balance sheet items would cause the Current Ratio to change? - Correct answerCash, Inventory, Accounts Receivable, Accounts Payable, Accrued Expenses What is the term that refers to corporate managers acting in their own interests rather than the stockholders? - Correct answer-Agency Cost What is the difference between market order and limit order? - Correct answer-Market order: Executes at prevailing market price Limit: Places a price restriction on order What are the 3 functions of prices? - Correct answer-Convey information, affect incentives, and affect distribution of income What is a "secured" loan? - Correct answer-The firm pledges collateral to back the loan What is net working capital? - Correct answer-Current assets (excluding cash) minus current liabilities What information is needed in capital budgeting? - Correct answer-Cash flows (initial, differential, & terminal) and the discount rate What is "free cash flow"? - Correct answer-Cash flows from operations minus cash necessary for reinvestments in PPE Why would APY be greater than APR? - Correct answer-Interest compounded more frequently than annually What are two types of markets? - Correct answer-Auction market and dealer market What are the two ways a stock investor can profit from buying back stock? - Correct answer-Dividends and capital gains According to the efficient market hypothesis, why might a stock price increase? - Correct answer-New information that causes investors to expect higher profits According to the Gordon Growth Model, what would cause a stock price to increase? - Correct answer-Increase in the expected growth rate of dividends or a reduced required return According to the CAPM, what would cause the required return on a stock to increase? - Correct answer-Increase in Beta or an increase in the risk-free rate What is the "Matching Principle"? - Correct answer-Revenue recognized must be matched with the expenses incurred to generate revenue What determines when revenue is "recognized" on the income statement? - Correct answer-When the product is shipped to the customer, not actual receipt of cash from the customer How do you calculate EBIT? - Correct answer-Sales minus all expenses except interest and taxes How do you calculate EBT? - Correct answer-Sales minus all expenses except taxes Why might a company choose to decrease sales? - Correct answer-Because sales exceed Search Results Sustainable Growth Rate (SGR) & limited access to financing What is a possible bad side-effect of a high sales-to-inventory ratio? - Correct answerLost sales due to lack of inventory What is the difference between municipal bonds and treasury bonds? - Correct answerTreasury bonds are issued by the federal government; municipal bonds are issued by stage-local governments