WGU C214 Financial Mgmt Pass the OA Exam, With Complete Solution 2023

WGU C214 Financial Mgmt Pass the OA Exam, With Complete Solution 2023 Characteristics of preferred stock includes -dividends in arrears -dividends are cumulative -higher payoff claim in a BK (has first dibs in a BK) -considered "hybrid" (part stock/part bond) -no fixed maturity date -no voting rights -can skip dividend payments -dividends don't change year-after-year -used in start ups (IPO) Preferred stock dividends can go without payment and pay in arrears the following year Characteristics of common stock are -voting rights -no maturity date -corporate governance -lower payoff claim in BK -variable returns -unlimited earnings potential -earnings are in dividends & the increase in price of stock New start up ventures often issue preferred stock (in an IPO) What stock is considered a hybrid preferred stock One thing common stock and preferred stock have in common is both have no maturity date Which type of security has voting rights common stock Debt covenants and restrictions help to ensure that management is meeting bond and shareholder expectations NOTE: covenants are promises meant to be kept What is true regarding bonds -when bond matures, bondholder gets lump sum back -coupon rate doesn't change -maturity is in years -PAR value is typically $1000 -Future value (same as PAR) is typically $1000 Bond sells at face value when required rate of return is equal to the coupon rate Why are bonds the primary method for raising capital because bonds remove the intermediary costs NOTE: IPO's require an intermediary known as a syndicate - a group of banks underwriting the security issue What type of bond can be traded for stock convertible bonds What is the interest rate for annual payments of a bond known as the coupon rate NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged Coupon rate is the established rate of the bond and should never change Debentures are secured 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 Secured loan has collateral like a mortgage 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 Duration measures the market risk of a bond and is the percentage drop in price caused by a 1% increase in yield (rate) NOTE: measurement of the drop in price after a rate increase Maturity of bonds is calculated in years A bond premium occurs when bonds are issued for an amount greater than their face or maturity amount; caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds Junk Bonds are high yield bonds without any stability "Leveraged" results in having more debt (bonds) than equity (stock) and lower stock prices NOTE: recall that debt is safer and levels out risk in a portfolio In current assets, inventory is the LEAST liquid of current assets NOTE: current assets take less than 12 months to make liquid Net fixed assets are long term assets such as buildings, land, equipment, machinery NOTE: assets that are not current A/P represents money paid to suppliers for what is bought on credit and amount owed by a business to suppliers by agreement NOTE: A/P is supplies, inventory, or PP&E Notes payable involves an explicit interest bearing arrangement with the lender at interest cost NOTE: notes payable is a long-term liability Current liabilities are listed in order of maturity NOTE: current liabilities are to be paid within 12 months Two things you can do with net income pay out as dividends or retain (plow back into the firm) On the Statement of Cash Flows, CFO's include -cash receipts from customers (inflow) -cash paid for inventory (outflow) -cash paid for wages (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which is NOT considered an operating expense interest expense is NOT considered an operating expense On the Statement of Cash Flows, CFI includes cash receipts from sale of property and equipment (inflow), cash paid for purchase of equipment (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which of the following is true with respect to CFO an increase in inventory indicates a reduction in CFO NOTE: there is a cost (reduction) to purchasing (increasing) inventory The Statement of Cash Flows is not useful when addressing the financial health of a firm due to the impact of accrual accounting FALSE - the impact of accrual accounting is seen as MOST useful in relation to net income Which is true with respect to CFF an increase in notes payable indicates an increase in CFF Which is not a part of the Statement of Cash Flows cash flows from liquidating activities NOTE: cash flows are operating, investing, and financing The sum of CFO + CFI + CFF is equal to the change in cash during the period Depreciation expense is a significant source of difference between net income and CFO because depreciation is a non-cash expense on the Income Statement associated with the acquisition of long-term assets Subordinated bonds are bonds not backed by collateral For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet TRUE NOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet Increases in operating assets and decreases in operating liabilities will decrease CFO NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO) Unsecured loan has no collateral NOTE: a credit card is an example Assuming no asset disposals, CFI is the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense Assuming no asset disposals, depreciation expense is equal to the change in ACCUMULATED depreciation Assets are financed by other people's money or equity Dividends are considered CFF (financing section) A firm with positive CFO should be considered healthy FALSE NOTE: a positive CFO can still be detrimental to the firm depending on other factors The increase in yield (rate) causes the bond prices to decrease (and vice-versa) NOTE: when interest rates increase, bond prices decrease A working capital increase caused by an increase in inventory will be a cash outflow NOTE: capital increase is inventory purchased so money goes out A firm can sustain negative CFO indefinitely by borrowing, selling equity, and/or by selling assets FALSE NOTE: a firm can NOT sustain negative CFO forever Which should NOT be included in the calculation of CFF a change in retained earnings Dividing CFO among the owners of a firm is a sustainable policy FALSE NOTE: CFO doesn't allow for required reinvestment Dividing CFO among owners of a firm is NOT a sustainable policy TRUE NOTE: CFO doesn't allow for required reinvestment A firm reports the following cash flow data CFO 1 million, CFI 750K, and CFF -100K. Is the firm sustainable Yes, the firm is sustainable. CFF may be due to paying down debt, buying back stock, or paying dividends When calculating CFO, an increase in an operating liability such as A/P or accrued wages represents