AQA • WGU
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Which area of finance deals with sources of funding and the capital structure of corporations and seeks 
to increase the value of a firm to its owners? 
-Business finance 
-Real estate 
-Investments 
-Financial institutions - A 
What is the primary difference between finance and accounting? 
-Accounting involves investing and forecasting, while finance summarizes a company's financial 
information. 
-Finance provides financial data to decision makers, and accounting involves making decisions us...
A company is trying to finance a project with a mortgage loan from a bank. The company's assessment 
of the project indicates that the company may experience several years of loss until the project becomes 
profitable. This means that the company might lose its ability to pay back the loan and the interest on 
the mortgage. What action might the bank take to protect its interest? 
-Let the company manipulate accounting procedures. 
-Set a strict covenant that the company cannot easily achieve. ...
Accounting - The system of recording, reporting, and summarizing past financial information and 
transactions. 
Agency Costs - Costs that are incurred when management does not act in the best interest of 
shareholders; related to the maximization of shareholder value; firms mitigate some of these costs is by 
attempting to align managers' interests with shareholders' interests and compensate with shares in the 
company 
Agency Problem - When the agent (the management) does not act in the best ...
How is risk defined in finance? - The possibility that the realized or actual return will differ from 
what we expect 
The nominal interest rate of an investment is 8%, and the inflation rate is 3%. What is the real interest 
rate? - 5% 
What is another name for the cost of capital? - Discount rate 
What is the name for the minimum rate of return that an investor or lender will accept for investments? 
- Required rate of return 
What is the rate at which the average price level of particular goo...
What is the term for the percentage of the principal that a lender charges a borrower for the use of 
assets? - Interest rate 
How is the interest rate expressed? - as a percentage 
What is the main purpose of charging interest? - It allows borrowers to pay to use the assets of 
another entity to accomplish their own goals. 
What is a component of the required rate of return? - Opportunity cost 
Why would a long-term investment require a higher rate of return? - There is greater risk 
involved a...
A company that produces soap, shampoo, lotion, and other personal care products has recently taken a 
hit due to a competitor's new product line. The company decides to reduce wages for its labor force to 
save money while the company focuses on building up its reputation again, but the company's labor 
force goes on strike to protest the pay cuts. What type of risk does the strike represent? - 
Idiosyncratic risk 
adaptive expectations - When the prices of goods and services go up, employees...
liquidity ratio - is a measure of not only how much cash you have but also how easily you can 
convert short-term assets into cash. 
activity ratio - the firm's operational efficiency and profitability. 
activity ratio - efficiency ratio 
leverage ratio - financing ratios or solvency ratios 
leverage ratio - how the firm is financed. 
profitability ratio - based on either sales or asset investment 
market ratios - used to evaluate the current share price of a public firm's stock. 
liquidity ra...
Ratios are useful for analyzing and comparing company performance for at least four different reasons: - 
Standardization 
Flexibility 
Focus 
Evaluation 
You can standardize the companies' net incomes by - dividing both by the total sales of those 
companies. This will help you to see how much income in percentage terms was earned from the total 
sales made during the year. 
Standardization - ratios standardize financial data, thus making it comparable across firms—even 
those of distinctly ...
Firm A has an average collection period of 67 days, and the industry norm is 40 days. What can the firm 
do in order to be competitive with accounts receivable management in the industry? - Tighten the 
credit standards for its customers. 
MiniCo recently spun off of BigCo. Both companies have the same leverage and asset turnover ratios, 
but MiniCo is underperforming on its return on equity to shareholders. If MiniCo would like to improve 
its return on equity, which action would help? - Reduce...
A company calculated variances of a budget and actual cash flows that indicate the firm's strengths and 
weaknesses in cash flows and its budgeting process. 
Which major use of cash budgeting is this an example of? 
-Corrective action 
-Standardization 
-Assessment of future needs 
-Performance evaluation - D 
A company is developing a financial forecast for the next year. The company plans to implement a new 
factory that will increase production and resulting sales by 20%. 
Since the company...