EZC1 – Finance WGU

question

main line finance disciplines
answer

corporate finance, investments, institutions
question

capital budgeting analysis
answer

process of determining what capital assets to buy
question

finance your company with …
answer

own money (equity) or the bank’s money (debt).
question

Equity
answer

Amount of owners’ portion of a business.
question

debt
answer

Money lent by a creditor to provide financing to the borrower
question

Asset manager
answer

someone who invests funds in an attempt to earn positive returns (old term – money manager)
question

Mutual funds
answer

Portfolio of assets professionally managed for others to invest in – your stock
question

Venture capital
answer

Professionally managed investment capital that typically invests in very young new ventures – Private companies
question

asset pricing
answer

process of valuing assets
question

current market value
answer

what someone would pay right now for an asset
question

If there is a big enough difference between the estimated price and the current market price,
answer

the investor will either buy the asset (if the analysis indicates the asset is underpriced) or sell the asset (if overpriced)
question

Longing
answer

buying
question

shorting
answer

selling
question

passive investing strategy
answer

investing without active management
question

fair return
answer

acceptable return on a passive investment
question

Dollar cost averaging
answer

where the investor invests a set amount each month in a no-load mutual (or index) fund.
question

tax sheltered plan
answer

retirement plan individuals can use to avoid taxes, such as a 401K or Roth IRA.
question

investments
answer

chose which assets to invest in
question

institutions
answer

banks – commercial; insurance companies; pension funds
question

corporate finance
answer

the finance function of the business
question

Mutual Fund managers
answer

buy stocks or bonds with investor money. The managers attempt to find under-valued or growth stocks (or bonds) and buy low, sell high
question

Hedge fund managers
answer

earn a strong return for their investors. However, managers are not restricted to buy (long) positions only. They can also sell stocks and bonds (short) and can buy and sell financial derivatives (stock options, for example).
question

I-bankers primary roles
answer

1) company/industry analysis, 2) mergers and acquisitions, 3) raising capital via corporate offerings, 4) sales and trading, 5) private client services, and 6) back office support
question

Nine Career Tracks within Finance
answer

1.Commercial banking 2.Corporate finance 3.Financial planning 4.Insurance 5.Investment banking 6.Money management 7.Real estate 8.Hedge funds 9.Private equity
question

Balance Sheet Equation includes
answer

Assets = Liabilities + Owners’ Equity
question

Common current assets
answer

cash, marketable securities, accounts receivable, and inventory.
question

Accounts receivable (AR)
answer

shows the total dollar amount we have sold to our customers but not yet collected (usually within 30-60 days).
question

LIFO – FIFO
answer

(Last In, First Out) (First In, First Out)
question

Accounts payable (AP)
answer

money that the company owes to another company as a result of purchases made on credit
question

Accruals
answer

obligations that a company has incurred in the current period but has not yet paid.
question

notes payable
answer

involve an explicit interest-bearing lending arrangement between the company and a lending institution
question

Retained earnings (RE) is generated from
answer

the operations of the company that is plowed back (or retained) in the business.
question

Change in RE = (Retained earnings)
answer

Net Income – Dividends
question

Fixed Asset
answer

Assets on the balance sheet with a life span greater than one year
question

current liabilities
answer

obligations that are going to require cash in the next year. These liabilities are listed in order of maturity, with the shortest maturity listed first
question

Income Statement
answer

describes the revenues and expenses associated with a company’s operations for a given period of time (that is why it is dated \”for the period ended\”). Due to the many possible accounting assumptions and vagaries surrounding each line item on the income statement, it is far more susceptible to misinterpretation than is the balance sheet
question

balance sheet
answer

a snapshot of the firm’s assets and the financing of those assets at a given point in time (that’s why it’s dated \”as of\” a particular date). It is a listing of all of the assets, liabilities, and equity of the firm
question

the accounting rules (the matching principle) governing cost recognition
answer

require that production costs be recognized with the associated revenue
question

EBIT means
answer

Earnings Before Interest and Taxes,
question

Net income is created by ( it can pay it out as dividends to shareholders or retain it within the firm.) =
answer

Dividends + Change in Retained Earnings
question

New RE = Old RE + Change in RE
answer

this year’s retained earnings equal the sum of last year’s retained earnings balance plus the change in retained earnings from the current year
question

New RE = Old RE + Net Income – Dividends
answer

Net Income – dividends = change in RE
question

Red Flags in Earnings
answer

Watch the inventories Beware of rising receivables Uncover extraordinary expenses Investigate asset sales Who’s skimping on research? When is revenue really not? Spot out-of-balance growth
question

cash flow statement
answer

the sources and uses of cash for the company—it shows cash in and cash out of the company for a given year.
question

cash flows are divided into three groups:
answer

cash flows from operations (CFO), cash flows from investing (CFI), and cash flows from financing (CFF). The sum of all of these cash flow sources should equal the company’s change in cash for the year.
question

constructing the statement of cash flows requires
answer

both the balance sheet and income statement
question

Current liabilities and current assets are
answer

obligations that will require cash within the next year. and items that will generate cash within the next year
question

Quick Ratio =(current assets-liquid inventory) – current liabilities – involves what?
answer

cash, marketable securities, accounts receivable, and inventory acknowledges this difference in liquidity by subtracting inventory from current assets (leaving only the three most liquid current asset types in the numerator)
question

Daily credit sales, or credit sales per day, is simply annual credit sales divided by 365.
answer

Average Collection Period = AR / Daily Credit Sales
question

It is simply credit sales divided by AR. An AR turnover ratio of 12 means that the company collects its entire accounts receivable
answer

AR Turnover = Credit Sales / AR
question

the number of times it turns (or sells) its inventory annually. Inventory turnover is calculated as cost of goods sold divided by inventory
answer

Inventory Turnover
question

Total Asset Turnover calculates
answer

how many dollars in sales the firm generates per dollar of assets it owns.
question

Total Asset turnover =
answer

sales / total assets
question

Fixed asset turnover
answer

calculates sales generated per dollar of fixed assets. Fixed assets include all non-current assets, or total assets minus current assets.
question

Fixed Asset turnover =
answer

sales / fixed assets
question

OIROI (Operating Income Return on Investment)
answer

operating income / total assets
question

OIROI (also be classified as a profitability ratio) is
answer

how much pre-tax, pre-financing profit the company generates per dollar of assets.
question

theory of JIT
answer

to bring something off the truck and put it directly into the assembly line. The product is shipped out immediately after it is made
question

Debt Ratio
answer

Total Debt / Total Assets
question

Times Interest Earned =
answer

EBIT / Interest Expense
question

times interest earned
answer

how many times a company covers (or could pay) its interest expense given its earnings.
question

Return on assets, or ROA,
answer

compares the firm’s annual net income to the total asset base used to generate that income. It shows how profitable the firm is given its asset investment
question

the return on equity (ROE) ratio
answer

compares annual net income to total equity
question

Gross Margin, Operating Margin, Net Margin
answer

To calculate gross, operating, and net margin, we simply take each of these three primary profitability measures and divide it by sales
question

DuPont Equation
answer

Return on Equity = Net Profit Margin × Asset Turnover × Leverage Multiplier
question

Net Profit Margin.
answer

Net Profit Margin equals Net Income/Sales
question

Asset Turnover
answer

Sales/Assets
question

Leverage Multiplier
answer

Assets/Equity
question

ROIC = NOPAT / (Costly Capital)
answer

Return on Invested Capital = where NOPAT is equal to net operating profit after taxes and is defined as EBIT (1 – t) and Costly Capital equals all interest bearing debt plus total equity
question

FCFF means
answer

Free cash flow to the firm
question

Cash Tax Payments means
answer

Total tax payments from the income statement
question

Depreciation means
answer

Depreciation from the income statement (or two balance sheets
question

EBIT means
answer

Earnings before interest and taxes (from the income statement)
question

CAPEX means
answer

Capital expenditure (gross property, plant, and equipment) changes from two balance sheets
question

NWC means
answer

Net working capital (current assets – current liabilities) changes from two balance sheets
question

base equation for measuring Free Cash Flow to the Firm is
answer

FCFF = EBIT – Cash Tax Payments + Depreciation – CAPEX – Increases in NWC
question

We want to measure the cash flows that are left over for equity holders after all company operations and after paying the creditors (interest and debt due).
answer

FCFE = NI + Depreciation – CAPEX – Increases in NWC + Increases in Net Long-Term Debt
question

Trend analysis
answer

looks at a firm’s financial ratios over time; generally looks backwards five years and forecasts forward three years.
question

cross-sectional analysis
answer

compares a firm’s financial ratios with those of some peer group. its competitors, its industry, or even the market in general, and thus tells the analyst something about the target firm’s relative strength (or weakness) and performance.
question

three main comparison methods used in ratio analysis
answer

trend analysis; cross sectional analysis and measure progress and achieve goals
question

FCFF =
answer

EBIT – Cash Tax Payments + Depreciation – CAPEX (capital expenditure) – Increases in NWC (Net working capital)
question

Current Ratio =
answer

Current Assets / Current Liabilities
question

Quick Ratio =
answer

(Current Assets – Inventory) / Current Liabilities
question

Inventory Turnover =
answer

COGS (cost of goods sold) / Inventory
question

Discretionary Financing Needed or DFN
answer

This additional financing : a number of assumptions about the future increase in sales, the current relationship between sales and assets, and the firm’s profitability: how much more financing we will need to sustain future expected growth
question

The goal of financial forecasting
answer

to understand the impact of decisions we make today on our reported results tomorrow, as well as to avoid making dumb mistakes in the future
question

pro forma
answer

estimated
question

Percent of Sales Method – Sales forecast
answer

1.Project sales revenues and expenses 2.Forecast change in spontaneous balance sheet accounts 3.Deal with discretionary accounts 4.Calculate retained earnings 5.Determine total financing needs/assets 6.Calculate DFN
question

Spontaneous accounts
answer

accounts on the income statement and balance sheet that change automatically in proportion with sales – current assets; accruals – wages and tax; accts payable
question

non-spontaneous accounts
answer

discretionary accounts. – These accounts do not increase automatically with sales but are left to the discretion of management
question

discretionary accounts constant
answer

note payables; long term financing; common stock
question

plug figure
answer

added to the balance sheet to ensure both sides equal
question

Perpetuity
answer

an infinite stream of equally spaced, equal cash flows.
question

ordinary annuity
answer

annuity that pays at the end of each period End Mode -searching for End pay
question

annuity due
answer

annuity that pays at the beginning of each period time zero plus future payments = total annuity due Begin Mode in calculator
question

future value
answer

how much spending power money has at a point in the future
question

uneven cash flows
answer

cash flow stream falls in the broad category we have to discount or compound each individual flow separately using the present/future value approach that we used for single sums and then add them together
question

deferred annuity
answer

a standard annuity whose first payment is deferred to some point in the future
question

earning by share
answer

earning available to common stockholders divided by the number of common stocks shared outstanding
question

Debit to total assets ratio
answer

Total assets = Total debt + Total equity
question

dividend n preferred stock
answer

common stock w no growth in dividends

Get instant access to
all materials

Become a Member