2024 WGU C214 Financial Management OA Study Set PDF

QUESTIONS AND ANSWERS Exam 2024 WGU C214 FINANCIAL MANAGEMENT OA STUDY SET COMPLETE EXAM QUESTIONS AND CORRECT ANSWERS TESTED AND CONFIRMED A+ ANSWERS What is included in the Income Statement and NOT in the Statement of Cash Flows? Depreciation Expense Computation of Net Income: A co. sold products...

QUESTIONS AND ANSWERS Exam 2024 WGU C214 FINANCIAL MANAGEMENT OA STUDY SET COMPLETE EXAM QUESTIONS AND CORRECT ANSWERS TESTED AND CONFIRMED A+ ANSWERS What is included in the Income Statement and NOT in the Statement of Cash Flows? Depreciation Expense Computation of Net Income: A co. sold products in 2014 for $120k and collected $100k cash and remainder in 2015. Co. incurred $70k expenses for 2014 and paid $100k which included $30k for expenses incurred in 2013. What is net income for 2014? - Computation of Net Income (R-E=NI) $50,000 Net Income = $120k - $70k = $50k, or Revenues - Expenses Incurred = Net Income Retained Earning Statement: The beginning retrained earnings on 1/14/14 is $25k. The NI for 2014 is $50k and the dividend payout ratio is 25% of NI. What are retained earnings on 12/31/14? - Retained Earning Statement: $62,500 Retained earnings on12/31/14 = $25k + $50k - (.25x$50k) = $62,500 Retained Earnings: Firm reported RE of $300 in 12/31/12. For 12/31/13 firm reports RE of $400 and pays dividends of $25. What is NI in 2013? - Retained Earnings: Answer $125 Logic is $300 from $400 is $100 plus the $25 dividend totals out to $125. 300 + NI - 25 = 400: NI=125, so 300+125-25=400 Balance Sheet: Basic equation for the Balance Sheet is? - Balance Sheet: Equity = Assets - Liabilities, or it can also be seen as Assets = Liabilities + Equity Investment: Simple Interest: An investment of $10k made today at 8% simple interest for 3 yrs and 9 mo. will yield in principle and interest of? - Interest: Simple Interest $13,000 Principal + Interest = $10,000 + (10k x.08x3.75) = $13k Investment returns: A stock will be worth $36 at EOY and will pay dividend of $2.25. If you need a professional to complete your college homework at a small fee, then reach out to amazingclasshelp.com How much should an investor pay for the stock if investor expects a 12% rate of return? Investment returns: Highest price for stock = X+0.12= $36+$2.25/1.12 (add "1" to 12% as "X" variable) = $38.25/$1.12 = $34.15 Investment: Rate of Return You want to purchase Ord common stock at $55/share, hold 1 year, and sell after $3 dividend is paid. What would stock price be to satisfy your required ROR of 15%? Investment: Rate of Return $60.25 Price=$55 + (.15x$55) -3 = $60.25 Investment: Stocks Two types of expected returns when investing in stocks? - Investment: Stocks 1. Dividends 2. Appreciation of the price of stock = Total return in the investment of stock Investment: Stock A broker purchased stock that pays $1.15 annual dividend for %16 w/a required ROR of 15%. What is the actual return if sold at EOY 1 for $19? - Investment: Stock ROR=(($1.15+$19)-16) /16 =.259 or 25.9% ((Dividend+EOY stock price)-begin stock price) / by begin stock price = actual return %. Gordon Growth Model: A stock is expected to pay dividend of $5 for current year and is expected to grow at rate of 4% per year. If required ROR is 10%, what is the max amount that should be paid for the stock today? - Gordon Growth Model: $83.33 GGM=5/(.10-.04)=$83.33 Tip: "grow rate of dividend" language = GGM Gordon Growth Model: A person buys shares of a co at $45. Recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year? - Gordon Growth Model: 14.9% $45=(2x1.10) / (ER-.10) $45ER - $45x.10=$2.20 ER=($4.5+$2.2)/45=14.9% Gordon Growth Model: A stock is expected to pay a dividend of $5 per year in perpetuity. If the required ROR is 10%, what is the max amount that should be paid for the stock today? - Gordon Growth Model: $50 It's GGM because the word "perpetuity" which means the same amount or "0" $5/.10 - 0 = $50 Investment: Probability Distribution What is expected ROR for stock where 60% chance of recession and 40% chance of expansion? The stock return 2% during recession and 8% in expansion. - Investment: Probability Distribution.044 Cycle Prob Stock Reces. 60%.02 Expan 40%.08 E(r)=(.6*.02)+(.4*.08)=.044 What is portfolio ROR? Expansion prob 55%, Recess prob 45% Stock A - Expan R is 15%, Recess R 2% Stock B - Expan R is 12%, Recess R -3% We own $75k of A and $15k of B -.0851 E(r) for A=((.45*.02)+(.55*.15))*75k=6852.5 E(r) for B=((.45*-.03)+(55*.12))*15k=787.5 Portfolio Return=((6852.5+787.5))/90000=.0851 Capital Budgeting refers to? -...the process used in making investment decisions involving projects that generate cash flows over a multi-year horizon (more than a year). Cash Flow consists of? - Initial Outlay Differential Annual Cash Flows Terminal Cash Flow Initial Outlay consists of? - Cost of the Asset Shipping Costs Investment in Working Capital Differential Annual Cash Flows consist of? -...incremental cash flow generated every year. Terminal Cash Flow consists of? -...after tax proceeds from the sale of asset and release of working capital. Net Present Value (NPV) is defined as? -...the net present value of after tax cash flows and is the most commonly used method in Capital Budgeting. Internal Rate of Return (IRR) is defined as? -...the discount rate that results in a Zero Net Present Value. Compute After Tax Proceeds on Sale of Equipment - Terminal Cash Flow: Equipment w/a book value of $10k sold for $15k. Tax rate 30%. What is the proceeds from sale of equip? - Compute After Tax Proceeds on Sale of Equipment - Terminal Cash Flow: Gain on equip=$15k-$10k=$5k Tax on Gain=0.30*$5k=$1,500 Proceeds from sale of equip=$15=$1,500=$13,500 What is the differential cash flow given the following? Sales $50k Expenses $30k Depreciation $10K Taxes (.40) $4k - Differential Cash Flow: $16,000 Diff CF=(50k-30k)- ((50k-30k-10k)*.4) = 16k...if 4k taxes not given... TVM: M wants to have $20k in 4 years. How much should M invest now in order to have $20k in 4 years if she can invest money at 16%? - TVM: $11,040 N=4 I/Y=16 FV=$20,000 CPT then PV = $11,045.82 Impact of Inflation on Cash Flows: If the cash flow today is $100,000 and the annual inflation rate is 5%, what is the value of the cash flow at end of one year? - Impact of Inflation on Cash Flows: Value of cash flow= (1-.05)*$100,000=$95,000 The Statement of Cash Flows is? -...explains the change in the cash balance for one period of time. Cash Flow from Operating Activities consists of? - Net Income + Depreciation +/Decreases/Increases in Current Assets +/Decreases/Increases in Current Liabilities Cash Flow from Operating Activities: Which of the following would be added to Net Income in the operating activities section of a Statement of Cash Flows prepared using the indirect method? - Cash Flow from Operating Activities: If you need a professional to complete your college homework at a small fee, then reach out to Homeworkanalyzers.com...an Increase (+) in Accounts Payable Cash Flow from Operating Activities: Examples of Current Liabilities? - Cash Flow from Operating Activities: Accounts Payable -/+ decrease/increase in Current Liabilities Cash Flow from Operating Activities: If a company reports net income of $100k, depreciation of $20k, and an increase in Accounts Receivable of $5k, what is the cash flow from operating activities? - Cash Flow from Operating Activities: CFFOA=$100k-$20k-$5k = $115,000 Inflow Accounts Receivable +/- decrease/increase in Current Assets Cash Flow from Operating Activities: Examples of Current Asset? - Cash Flow from Operating Activities: Accounts Receivable +/- decrease/increase in Current Assets Cash Flow from Operating Activities: If a company reports net income of $100k, depreciation of $20k, and an increase in Accounts Payable of $5k, what is the cash flow from operating activities? - Cash Flow from Operating Activities: CFFOA=$100k+$20k+$5k = $125k Inflow Accounts Payable -/+ decrease/increase in Current Liabilities Cash Flow from Operating Activities: A company reports an increase in $5k in Accounts Receivable for the year and half will be collected next year. What is the impact on the cash flow from operations? - Cash Flow from Operating Activities: $5,000 decrease in cash flow for the year Accounts Receivable +/- decrease/increase in Current Assets Cash Flow from Investing Activities: Which of the following would be considered a cash outflow in the Investing Activities section of the Statement of Cash Flows? - Cash Flow from Investing Activities: Purchase of equipment. Cash Flow from Investing Activities: Last year firm recorded Net PPSE of $4,600, this year Net PPSE at $4,500. If depreciation expense for last year and this year are $500 and $800, what is the CFI of company? - Cash Flow from Investing Activities: ($700) CFI=$4,600+ X - $800 = $4,500 X=4500-4600+800=700 700 of PPE was purchased, cash outflow of (700) Cash Flow from Investing Activities: If net change in PPE is $10k and depreciation expense is $2k, what is the Cash Flow from investing activities? - Cash Flow from Investing Activities: End PPE=Beg PPE + X - Depreciation (End PPE-Beg PPE)+Dep=X X=$10k+$2k=$12k Cash Outflow from investing activities Cash Flow from Finance Activities (Cash Inflow): If net change in long term liabilities is $20k, there is no change in common stock, and dividends paid are $5k, what is the cash flow from financing activities? - Cash Flow from Finance Activities (Cash Inflow): CFFFA=Net Change in Common Stock + Net Change in Liabilities - Dividends =0+20k-5k=$15k Cash Inflow from FA Free Cash Flow = Cash Flow from Operations Change in Net working capital Investment in PPE - Free Cash Flow = ((EBIT)*(1-Tax rate) + Depreciation) - Change in Net working capital - Investment in PPE Free Cash Flow. Cash Flow from Operations: A company reports EBIT of $1,000,000, depreciation of $30,000, change in working capital of ($10,000), net capital expenditures of $15,000 and tax rate of 40%. What is the free cash flow? - Free Cash Flow. Cash Flow from Operations: $625,000 FCF: (1,000,000)*(1-.4) + 30,000) - (10,000) - 15,000 = $625,000 Capital Structure. Degree of Financial Leverage: What is the DFL given Sales of $100k, Variable costs of $60k, Fixed Costs of $15k and Interest Expense of $4k? - Capital Structure. Degree of Financial Leverage: Calculate EBIT by Sales-VariableCosts-FixedCosts =EBIT is 100k-60k-15k=25k DFL=EBIT/(EBIT-IntExp) = 25k/(25k-4k) =25k/21k=1.19 If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? - Higher profits to shareholders If you need a professional to complete your college homework at a small fee, then reach out to Homeworks4u.org Degree of Operation Leverage: What is the DOL given Sales of 100k. Variable Costs of 75k and EBIT of 10k? - Degree of Operation Leverage: 2.5 DOL=(Sales-VariableCosts)/EBIT=2.5 (100k-75k)/10k=2.5 Degree of Operating Leverage is known as Business Risk - A DOL of 2.5 means that if there is a 1% increase/decrease in Sales it will lead to a 2.5% +/- in EBIT Current Ratio: Lil Corp's total current assets 390k, non-current assets 630k, current liabilities $330k, long-term liabilities $420k stockholders' equity $270. The Current Ratio is closest to? - Current Ratio: 1.18 CurrentRatio=CurrentAssets/CurrentLiabilities $390,000/$330,000=1.18 Means $1.18 in Liquid assets to $1 in Current Liabilities! Based on data below what is the current ratio? Accounts Rec $600 Inventory $800 Fixed Assets $1,000 Accounts Pay $500 LongtrmDebt$900 CommnStock$400 - 2.8 Current ratio = (CurrentAssets)/Accounts Payable (600+800)/500=2.8 Current Assets can be converted to cash within how many months? - Within 12 months. E.g. are "Accounts Receivable" and "Inventory" Current Liabilities are things you need to pay within how many months? - Within 12 months. E.g., "Accounts Payable" Long-Term debt takes how many months? - Beyond 12 months Market Rate=CouponRate; Bonds will sell at par value Market Rate >CouponRate; Bonds will sell at discount Market Rate CouponRate; Bonds will sell at discount Market Rate