WGU C214 - Financial Management Study Guide With Complete Solution

Hedging - Answer The process of eliminating risk Tariffs - Answer Taxes levied on goods imported into a country Foreign Exchange Risk (AKA FX Risk) - Answer Risks associated with the changing values of countries' concurrences Direct Quote - Answer If 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 Quote - Answer When a currency exchange rate is started with the currency of interest in the denominator. USD/EUR = $0.901 Floating Exchange Rate - Answer If 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 Rate - Answer A 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 Rate - Answer Currencies 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: - Answer Financial derivatives and direct investment. Financial Derivatives - Answer To use a derivative contract also known as a Currency Forward. Currency Forward - Answer An agreement for delayed delivery. Direct Investment - Answer A direct investment strategy requires a firm build infrastructure in the country where sales occur. It's very straight forward. FX Hedging - Answer Allows firms to focus on making profits through their operations and not trying to guess which direction FX rates will move. Tariffs - Answer The motivation for tariffs is the protection of domestic industries. Currency Restrictions - Answer The idea is to limit the ability of a foreign firm to take capital out of a country. FASB (Financial Accounting Standards Board) - Answer 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. Outsourcing - Answer To produce a product or service outside of the country. Outsourcing Disadvantage - Answer A potential disadvantage to this type of outsourcing is that manufacturing jobs have dried up in the U.S. Capital - Answer A financial asset the can be used by a firm. An example of capital may be cash held by a firm or machinery. Equity - Answer Ownership in an asset such as a company. Often another name for stock. Capital Budgeting - Answer Is the planning of a firm's long-term investments. Corporate Finance - Answer The decision making by a firm's management. Stocks & Bonds - Answer Are two types of financial instruments. Treasury Securities - Answer Bonds that are issued by the U.S government to raise capital. Corporate Bonds - Answer A debt instrument this is issued by a corporation in order to raise capital. A bond is similar to a loan? - Answer True Market Efficiency - Answer The 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? - Answer (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? - Answer (22.08-22.10 + 4)/22.10 = 0.1801 or 18.01% What is the goal of a firm? - Answer To maximize shareholder value What is a way firms can maximize shareholder value? - Answer Invest in new machinery that will be profitable. What are ways firms can maximize shareholder value? - Answer Hire new employees to improve production and the profitability. Agency costs - Answer Are 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? - Answer Agency costs and potential unethical behavior Which of the following is a reason for the difference between CFO and net income? - Answer Net income includes gains and losses from the sale of assets