WGU C214 Financial Management Questions and Answers Scored A+

WGU C214 Financial Management Questions and Answers Scored A+ Initial Outlay The total dollar amount to begin a project. Cost of Equity How much it costs a firm (in percentage terms) to use equity financing. From the investor's perspective, it is what they require given the riskiness/opportunity cost of the company. From the companies perspective, it is the same rate, but it is what it "costs" to attract those potential investors. It is the return they must give investors for them to invest with their company. American Depository Receipts (ADRs) Certificates issued by U.S. banks and traded on U.S. markets but represent shares of foreign stocks Degree of Operating Leverage (DOL) Business risk examines the %change in operating cash flow relative to the %change in quantity sold Degree of Financial Leverage (DFL) Financial Risk examines %change earnings per share relative to %change in OI (EBIT) National Banking Act of 1863 Federal regulation to deal with "wildcat banking" (state-mandated remote and inaccessible banks not federally regulated) Federal Reserve Act of 1913 Federal regulation to deal with bank runs and recessions; gave the 12 Federal Reserve banks the ability to print money to ensure economic stability. The Federal Reserve System created the dual mandate to maximize employment and keep inflation low. Form S-1 Original prospectus (registration statement) filed with the SEC by firms prior to the sale of new securities to the public. Net Present Value (NPV) Capital budgeting with TVM to analyze the projected profitability. Difference between the present value of cash inflows and the present value of cash outflows over a period of time. Internal Rate of Return (IRR) Capital budgeting with TVM to evaluate the attractiveness of a project or investment. The discount rate that forces a project's NPV to equal zero. Sarbanes-Oxley Act of 2002 Federal regulations resulting from corporate frauds such as Enron and designed to protect investors from fraud. Securities Act of 1933 Federal regulation as a result of the Great Depression. Requires firms to register with the SEC to sell public securities. Bank Holding Company Act of 1956 Federal regulation designed to protect the banking industry from competition. Gram-Leach-Bliley Act of 1999 Repeals the last vestiges of the Glass-Stegall Act of 1933 and created new financial holding companies allowed to engage in underwriting, selling insurance and securities and conducting both commercial and merchant banking Volcker Rule A federal regulation that prohibits banks from conducting certain investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds, also called covered funds. Form 10-Q Quarterly report that publicly traded companies must file with the SEC McFadden Act of 1927 Federal regulation designed to provide greater accessibility for bank customers. Glass-Steagall Act of 1933 federal regulation to curb bank failures by separating commercial/consumer banks from investment banks Degree of Combined Leverage (DCL) =DOL * DFL; measure of the sensitivity of pre-tax profits to changes in sales. Net Operating Profit After Taxes (NOPAT) =EBIT (1-tax rate); measure of profit that excludes the costs and tax benefits of debt financing Firm Analysis 1) Basic Data 2) Differences 3) Deepen Analysis 4) Cause + Cure Cost of Capital the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders Current Yield =investment's annual income (interest or dividends)/current security price; measure examines the current price of a bond, rather than looking at its face value. Discounted Cash Flow (DCF) Using TVM to forecast/estimate the present value of an investment/company based on its future cash flows Flotation Costs the transaction cost incurred when a firm raises funds by issuing a particular type of security dividends in arrears unpaid dividends on cumulative preferred stock; concern for common stock holders as common dividends can't be paid until arrears is paid off. Beta A measure of systematic security risk quantifies a security's price sensitive to changes in the market. Rule 144A Safe harbor for SEC to allow secondary trading of private securities to large accredited investors fixed/pegged Exchange Rate Currency matched to another currency Managed Floating Exchange Rate An exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies. S+P 500 Standard and Poor's index designed to approximate total stock market; benchmarks against 500 companies how well the market performs overall FINRA (Financial Industry Regulatory Authority) Private corporation that acts as a self-regulatory organization for its members Dodd-Frank Act of 2010 Federal regulation to regain control of financial institutions by the federal government after the 2008 meltdown; expanded authority over non-depository financial institutions FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989) Created requirements of banks issuing capital; anti-fraud tool to prosecute banks making intentionally bad loans and regulation of competency of the appraisers, supervisory standards, and accurate and full documentation. SEC (Securities and Exchange Commission) 1934 enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets Form 10-K Annual comprehensive summary report of a company's performance that must be submitted to SEC Free Floating Exchange Rate Determined by supply and demand of that foreign money Efficient Frontier graph representing a set of portfolios that maximizes expected return at each level of portfolio risk Fixed-Return Securities Another name for fixed-income securities. These are typically debt instruments, such as a bond. Preferred Stock Entitles holder to a fixed dividend, whose payment takes priority over that of common-stock dividends; no voting rights, but higher claim to profits. Required Rate of Return (RRR) Minimum annual percentage that must be earned by an investment before a company chooses to invest; discount rate; considers risk/OC Net Working Capital (NWC) =current assets - current liabilities; indicates company's ability to meet its current financial obligations and invest in other activities. CapEx (Capital Expenditure) =capital expense of PP&E (measured as CFI); money a company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. Cost of Debt How much it costs a firm% to use debt financing; usually loan interest rates Capital Budgeting Process of planning and managing a firm's long-term investments; 1) estimate amount and time of cash flows 2) evaluate cash flow to accept/reject decision Working Capital Management Management of cash required for day-to-day finances of the firm; 1) cash cycle 2) credit buy/sell 3) Floats 4) Current Assets: Cash 5) Current Assets: Inventory 6) Current Assets: Receivables 7) Current Liabilities: Payables Bid-Ask Spread the difference between the bid price and the asked price; compensation paid to the Specialist for offering liquid stocks Cash Accounting V. Accrual Accounting A.A= GAAP; recognizes R=E C.A= cash flow; cash IN=R, cash OUT=E Accounting V. Finance A: backwards looking and risk free F: forward looking and high-risk Accruals Non-cash accounting accounts representing money either owed or due, typically in the short term. Agency Costs incurred when managers do not attempt to maximize firm value and shareholders incur costs to monitor the managers and constrain their actions Market Efficiency The degree to which stock prices reflect all available, relevant information; increased unexpected returns= increased positive% returns, decreased unexpected returns=increased negative% returns Cash Flow from Operations (CFO) =NI + depreciation - change in NWC; measures the cash that a business produces from its principal operations and business activities Cash Flow from Investing (CFI) = (Change in Net PP&E + Depreciation Expense) x (-1); investment gains or losses and changes resulting from amounts spent on investments in capital assets, such as plant and equipment. Cash Flow from Financing (CFF) = CED − (CD + RP) where: CED = Cash from issuing equity/ debt, CD = Cash paid dividends, RP = Repurchase of equity/debt; net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.