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WGU C214 Revision 5 Study Guide
Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) - Ans F Stocks and bonds are two types of financial instruments (T/F) - Ans True The matching principle in accrual accounting requires that: a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. b. Expenses are matched to the year in which they are incurred c. Revenues are matched to the year in which they are booked d. Revenues should be large enough to match expenses - Ans a A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, you will most likely report a. revenues of $300,000 and expenses of $300,000. b. revenues of $300,000 and expenses of $200,000. c. revenues of $500,000 and expenses of $300,000. d. revenues of $500,000 and expenses of $200,000. - Ans c A firm reported retained earnings of $300 in 12/31/20x2. For 12/31/20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x a. 300 b. 400 c. 125 d. 100 - Ans c A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities - Ans a Why is the Balance Sheet known as a permanent statement? a. Because the statement is sent to the SEC.
b. Because the other statements are reset at the end of the fiscal year c. Because it is printed out and archived d. Because it persists in the minds of the shareholders. - Ans b How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends - Ans d Which of the following is generally true? a. Gross Profit and Operating Income are the same b. Cost of Goods Sold + Operating Expenses = Net Income c. Operating Income and EBIT are the same d. EBIT + Income Taxes = Net income - Ans c Which components are part of total assets? a. Cash, Accounts Receivable, Short Term Debt b. Cash Accounts Receivable, Inventory, Long Term Assets c. Accounts Payable, Long Term Assets, Long Term Debt d. Accounts Payable, Net Income, Equity - Ans b Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments - Ans d Which components are part of Total Liabilities? a. Accounts Payable, Accounts Receivable, Short Term Debt b. Long Term Debt, Common Stock, Retained Earnings c. Bonds, Accounts Payable, Mortgage d. Common Stock, Long Term Debt, Short Term Investments - Ans c Intel reported the following for 2014: Net Income 100, Depreciation 20, Change in A/R 10, What is the cash flow from operating activities (CF0)? a. 100,
Ans d Which is the purpose of the statement of cash flows? a. serves as the replacement for the income statement and balance sheet b. explains the change in cash balance at one point in time c. explains the change in cash balance for one period of time d. both (a) and (b) above - Ans c
. Financial data for Intel is given below for 2014:
- EBIT 1,000,
- Depreciation 30,
- Change in working capital (10,000)
- Net capital expenditures 15,
- Tax rate 40% Compute the Free Cash Flow for 2014 a. 610, b. 675, c. 625, d. 600,000 - Ans c .A company has cash sales of 200 and credit sales of 750. It's average accounts receivable is 90. What is the A/R turnover? What is the Average Collection Period? a. Turnover: 8.33 ACP:. b. Turnover: 10.56 ACP: 43. c. Turnover 8.33 ACP : 43. d. Turnover 10.56 ACP: 24.9 - Ans c The OIROI (Operating Income Return on Investment) uses what elements on the income statement? a. Operating Income, EBIT, Total Liabilities b. EBIT, Total Assets c. Sales, Total Assets, Equity d. Net Margin, Total Current Assets - Ans b Why would a company be interested in the TAT(Total Asset Turnover) ratio? a. How efficient assets are at producing income b. What the turnover of sales is to liabilities c. How efficient assets are at producing sales d. How efficient assets are to liabilities and equity - Ans c
If a company has current assets of 80 and fixed assets of 120, if Sales are 150 and EBIT is 35, what is the Fixed Asset Turnover? a. 5. b. 2. c. 0. d. 1.25 - Ans d If a company has current assets of 90 and fixed assets of 140, if it has debt of 125, what is its debt ratio? a. 1. b. 0. c. 1. d. 1.84 - Ans b A company has sales of 300, expenses of 200 and interest expense of 25, what is its Times Interest Earned ratio? a. 2. b. 4. c. 1. d. 3.00 - Ans b A couple wants to save up for a down payment on a house. They think they need to save 100,000 in five years. If the interest rate is 4% and they start at the end of the year when they both get bonuses from their employers, what do they have to put aside annually? a. 22,096. b. 17,752. c. 15,962. d. 18,462.71 - Ans d A person wants to put aside $500 at the beginning of each month for 10 years. If she estimates an interest rate of 5.5%, what will she have in her savings account at the end? a. 86,437. b. 70,154. c. 80,118. d. 76,905.66 - Ans c A couple has $25,000 in their retirement savings today. How many years do they have to save at 6%, putting in $1,000 at the beginning of each year to achieve $80,000? a. 20.
d. 981.29 - Ans a An investor wants to maximize the YTM. Which bond would they choose? Bond 1 has a price of $954 with a coupon rate of 7% and a maturity of 4 years. Bond 2 has a price of $972 with a coupon rate of 6.5 percent and a maturity of 6 years. Both have a face value of $1,000 and the coupon payments are paid semiannually. a. Bond 1: 8.38 Bond 2: 7. b. Bond 1: 4.17 Bond 2: 3. c. Bond 1: 5.22 Bond 2: 7. d. Bond 1: 8.38 Bond 2: 3.54 - Ans a A $1,000 bond matures in six years. It pays $35 every six months. The current market price is 1,075. What is the yield? a. 2. b. 3. c. 5. d. 6.03 - Ans c Which of the following gives the largest effective rate (APY) a. 18.6% compounded monthly b. 18.6% compounded daily c. 18.6% compounded weekly d. 18.6% compounded yearly - Ans b Suppose that an investment will pay 24% APR for a year and the interest will be compounded monthly. What is the expected APY for the investment? a. 24.50% b. 26.82% c. 25.41% d. 28.00% - Ans b A stock sells for 87.00 one year from now giving a total return of 8%. What is the dividend if the stock was originally purchased for 82.00. a. 5. b. 3. c. 8. d. 1.56 - Ans d What does a stock have to sell for one year in the future, if it currently sells for $75, has a planned dividend of $1.87 a share and an expected return of 14%?
a. 71. b. 76. c. 83. d. 85.42 - Ans c You are interested in buying a preferred stock and want to know what the rate of return is. The stock is selling for $85.00 and pays a dividend today of $2.25. What is the rate of return? a.. b.. c. .26 50 d. .2250 - Ans a The company expected to pay a dividend of $13.85 at the end of the year. Management has estimated growth at 2.75% and the stock is currently selling for $290.00. What is the expected rate of the return for this investment? a.. b.. c.. d. .0408 - Ans c One of your friends is recommending a stock if it sells for more than $165.00 per share. The growth rate is 4% and the latest dividend was $6.00. You are expecting an 11% return. Why should you buy or not buy the stock? a. Buy - The dividend is higher than the return b. Not Buy - The return is higher than growth c. Not Buy - The calculated price is too low d. Buy - The calculated price is higher - Ans c An investor wishes to know what the value of a common stock is if it pays a dividend of $6.00 today. The company's growth rate is 4.5% and the investor wants expects the stock to earn 7%. What is the value? a. 179. b. 240. c. 85. d. 250.80 - Ans d If a common stock is worth $75 and the growth rate is 5% with a dividend expected to pay $2.00 in a year's time, what is the expected rate of return? a.. b..
a.. b.. c.. d. .1275 - Ans a Capital is valued at 3,000,000 consisting of 1,600,000 of common stock, 1,000,000 of bonds, 400,000 of short-term debt. CAPM expected return is .135. Bonds before tax are .045. Short term debt costs .065. What is the after tax WACC if the tax rate is 35%? a.. b.. c.. d. .0874 - Ans d If a company has a capital structure of $100,000 common stock, $50,000 bonds and $10,000 preferred stock and the respective rates are 15% common stock, 3% bonds (after tax) and 4% preferred stock, what is the Weighted Average Cost of Capital? a.. b.. c.. d. .1128 - Ans a If a company has a capital structure of $5 million common stock with a cost of 17%, $ million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average Cost of Capital? The company has a 40% tax rate. a.. b.. c.. d. .0899 - Ans c If a company has a capital structure of internal equity of $15 million at 15%, a new offering of external equity of $5 million at 17% with flotation costs of 3%, and $10 million of bonds at 5% after tax, what is the Weighted Average Cost of Capital? a.. b.. c.. d. .1025 - Ans a A project has sales of 300,000, general expenses of 195,000 and depreciation expense of 25,000. The tax rate is 35%. What is the differential cash flow? a. 52,
b. 105, c. 80, d. 77,000 - Ans d Why is depreciation expense taken out of the net income calculation, yet added back at the end? a. Because fixed assets should remain on the balance sheet b. Because depreciation is not a current asset c. Because depreciation is a non-cash liability d. Because depreciation expense is tax deductible - Ans d A project has net income of 750,000 including depreciation expense of 42,000. What is the differential cash flow? a. 750, b. 708, c. 42, d. 792,000 - Ans d A piece of equipment is to be sold at the end of the project. Its appraised value is 420,000. A company makes an offer for 350,000. The equipment has a book value of 75,000. The tax rate is 40%. What is the salvage value if the company accepts the offer? a. 252, b. 207, c. 240, d. 350,000 - Ans c A piece of equipment was sold at the end of the project. The project received 85,000 for the equipment that carried a book value of 75,000. The tax rate is 35%. What is the salvage value? a. 10, b. 26, c. 85, d. 81,500 - Ans d A project is closing. Equipment is sold for 50,000 even though the book value was 75,000. The tax rate is 30%. The project started with 100,000 in working capital. What is the terminal cash flow? a. 127, b. 75, c. 152,
c. 11.549% d. 17.213% - Ans d Dinosaur Chicken Co. had sales of 70,000,000, expenses of 50,000,000 and paid 40% in taxes. It has equity of 42,000,000. The board approved dividends totaling 4,500,000. What is the company's Sustainable Growth Rate? a.. b.. c.. d. .1429 - Ans a UltraGrunge, Inc. earned 25 million after tax in the last year. The company has 100 million in assets and 85 million in equity. It has a policy of paying 12% of earnings as dividends. What is the SGR of UltraGrunge? a.. b.. c.. d. .2588 - Ans d What is the increase in Retained Earnings given the following:
- Sales are $10 million
- Net Earnings pre-tax are $1 million
- Dividend payout ratio is.
- Tax rate is 40% a. 400, b. 726, c. 880, d. 528,000 - Ans d What is the Sustained Growth Rate given the following:
- Sales are 2.5 million
- Total Expenses (including cost of goods sold through taxes) 2.0 million
- Total Assets are 3.0 million
- Equity is 1.3 million
- Dividend payout ratio is. a.. b.. c.. d. .3846 - Ans b
What is the Degree of Operating Leverage given Sales of 100,000. Variable Costs of 75,000 and EBIT of 10,000? a. 1. b. 2. c. 10. d. 2.05 - Ans b What does the Degree of Financial Leverage indicate? a. The firms cash balance b. The cost of financed assets c. The reliance on debt d. The reliance on assets - Ans c If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? a. Low Risk b. Appropriate Risk c. Higher ability to pay debt d. Higher profits to shareholders - Ans d What is the cash cycle? a. The speed of collecting cash from customers b. The amount of cash kept in banks c. The comparison of debt to cash d.The amount of time to regenerate cash - Ans d Why is float important to understand? a. To know how to keep the company profitable b. To know why the company needs cash c. To determine when to buy fixed assets d. To time cash expenditures e. None of the above - Ans d What should a company do to manage its working capital? a. Collect quickly and pay slowly b. Keep a large cash balance c. Maximize the use of long term investment d. Depreciate assets more slowly - Ans a
Future Forecasted Annual Cash Flows $100, Discount Rate 5% a. 2,400, b. 2,360, c. 1, d. 2,088,543 - Ans d What does the Sarbanes-Oxley Act require companies to do? a. Have a board of directors b. Register all foreign sales c. Make estimated tax payments d. Have internal control audits - Ans d FINRA (Financial Industry Regulatory Authority) does the following: (pick one) a. No foreign bribery by corporations b. Regulates bond prices c. Establishes Credit Unions d. Prosecutes naughty stock brokers e. Regulates Hedge Funds - Ans d If a product is made 100% domestically, what can affect its domestic market? a. International exchange rates b. International competition c. Product tariffs d. International political regulations - Ans b If a company makes its product in a foreign country where labor costs are much lower, what happens? a. Profits and domestic employment goes up b. Costs go up and domestic employment goes down c. Costs stay the same and domestic employment increases d. Profits go up and domestic employment decreases. - Ans d If the value of a dollar increases, the price of imports: a. Increases b. Decreases c. Stays the same d. Fluctuates - Ans b Why would a farmer buy a hedge when he signs a contract to sell produce overseas?
a. To avoid tariffs b. To reduce currency risk c. To increase profits d. To avoid competition - Ans b A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities - Ans a Why is the Balance Sheet known as a permanent statement? a. Because the statement is sent to the SEC. b. Because the other statements are reset at the end of the fiscal year c. Because it is printed out and archived d. Because it persists in the minds of the shareholders. - Ans b How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends - Ans d Which of the following is generally true? a. Gross Profit and Operating Income are the same b. Cost of Goods Sold + Operating Expenses = Net Income c. Operating Income and EBIT are the same d. EBIT + Income Taxes = Net income - Ans c Which components are part of total assets? a. Cash, Accounts Receivable, Short Term Debt b. Cash Accounts Receivable, Inventory, Long Term Assets c. Accounts Payable, Long Term Assets, Long Term Debt d. Accounts Payable, Net Income, Equity - Ans b Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments -
• A/R 600
- Inventory 800
- Fixed Assets 1,
- A/P 500
- Long term debt 900
- Common Stock 400 What is the current ratio? a. 1. b. 1. c. 2. d. 2.8 - Ans d If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? a. higher b. lower c. the same d. it doesn't matter - Ans a A company has cash of 100, accounts receivable of 250, inventory of 300, and accounts payable of 300. What is the quick ratio? a. 0. b. 2. c. 1. d. 1.17 - Ans d Suppose a firm has a financial leverage ratio of 2.50. What percentage of the firm's assets is financed by equity? a. 40% b. 70% c. 50% d. 60% - Ans a What is the present value of a stream of cash flows of $125,000 at a discount rate of 7%? a. 875, b. 1,552, c. 1,785, d. 1,250,000 - Ans c
What is the discount rate of a stream of cash flows of 50,000 that have a present value of 450,000? a.. b.. c.. d. .75 - Ans a What is the cash flow stream for a present value 1,000,000 at 5% paid in equal installments in the future? a. 35, b. 50, c. 500, d. 20,000 - Ans b A woman has just found out that a rich great-aunt has bequeathed a trust fund that pays $50,000 to her and to her descendants forever. If the trust fund earns 3.5% interest, what is the amount of the trust fund? a. 1,782, b. 5,000, c. 1,428, d. 2,529,123 - Ans c A man has just inherited $250,000. If he invests the money at 4.5%, what can he expect to have at the end of 15 years when he retires? a. 120,254. b. 483,820. c. 519,732. d. 477,862.41 - Ans b A company wishes to issue 10 year bonds with a face value of $1,000 and a coupon rate of 5.5%. The market has shifted before the issuance and the bonds will sell at 94% of face value. What is the YTM of the bonds when they are sold? a. 6.71% b. 5.50% c. 6.00% d. 6.33% - Ans d You want to buy a semiannual bond that has 4 years left before maturity. It has a 6% coupon rate and the market yield is currently 5.2%. What is the price you are willing to pay? a. 1,253.
