WGU C214 Financial Mgmt Pass the OA

Characteristics of preferred stock includes Ans- -dividends in arrears -dividends are cumulative -higher payoff claim in a BK (has first dibs in a BK) -considered "hybrid" (part stock/part bond) -no fixed maturity da ...

Characteristics of preferred stock includes Ans- -dividends in arrears -dividends are cumulative -higher payoff claim in a BK (has first dibs in a BK) -considered "hybrid" (part stock/part bond) -no fixed maturity date -no voting rights -can skip dividend payments -dividends don't change year-after-year -used in start ups (IPO) Preferred stock dividends Ans- can go without payment and pay in arrears the following year Characteristics of common stock are Ans- -voting rights -no maturity date -corporate governance -lower payoff claim in BK -variable returns -unlimited earnings potential -earnings are in dividends & the increase in price of stock New start up ventures often issue Ans- preferred stock (in an IPO) What stock is considered a hybrid Ans- preferred stock One thing common stock and preferred stock have in common is Ans- both have no maturity date Which type of security has voting rights Ans- common stock Debt covenants and restrictions help to ensure that Ans- management is meeting bond and shareholder expectations NOTE: covenants are promises meant to be kept What is true regarding bonds Ans- -when bond matures, bondholder gets lump sum back -coupon rate doesn't change -maturity is in years -PAR value is typically $1000 -Future value (same as PAR) is typically $1000 Bond sells at face value when Ans- required rate of return is equal to the coupon rate Why are bonds the primary method for raising capital Ans- because bonds remove the intermediary costs NOTE: IPO's require an intermediary known as a syndicate - a group of banks underwriting the security issue What type of bond can be traded for stock Ans- convertible bonds What is the interest rate for annual payments of a bond known as Ans- the coupon rate NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged Coupon rate is the established rate of the bond and should Ans- never change Debentures are Ans- secured bonds NOTE: debentures are a debt instrument (bond) issued to raise cash, secured against a company's assets and backed by credit, transferable by the holder, and may also be unsecured Secured loan Ans- has collateral like a mortgage The amount repaid at the expiration date of a bond is Ans- PAR value NOTE: expiration date is also known as maturity date PAR (or Face Value) is typically $1000 Duration measures Ans- the market risk of a bond and is the percentage drop in price caused by a 1% increase in yield (rate) NOTE: measurement of the drop in price after a rate increase Maturity of bonds is calculated in Ans- years A bond premium occurs when Ans- bonds are issued for an amount greater than their face or maturity amount; caused by the bonds having a stated interest rate that is higher than the market interest rate for similar bonds Junk Bonds are Ans- high yield bonds without any stability "Leveraged" results in Ans- having more debt (bonds) than equity (stock) and lower stock prices NOTE: recall that debt is safer and levels out risk in a portfolio In current assets, inventory is the Ans- LEAST liquid of current assets NOTE: current assets take less than 12 months to make liquid Net fixed assets are Ans- long term assets such as buildings, land, equipment, machinery NOTE: assets that are not current A/P represents money paid to Ans- suppliers for what is bought on credit and amount owed by a business to suppliers by agreement NOTE: A/P is supplies, inventory, or PP&E Notes payable involves Ans- an explicit interest bearing arrangement with the lender at interest cost NOTE: notes payable is a long-term liability Current liabilities are listed in order of Ans- maturity NOTE: current liabilities are to be paid within 12 months Two things you can do with net income Ans- pay out as dividends or retain (plow back into the firm) On the Statement of Cash Flows, CFO's include Ans- -cash receipts from customers (inflow) -cash paid for inventory (outflow) -cash paid for wages (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which is NOT considered an operating expense Ans- interest expense is NOT considered an operating expense On the Statement of Cash Flows, CFI includes Ans- cash receipts from sale of property and equipment (inflow), cash paid for purchase of equipment (outflow) NOTE: receipts of cash is inflow & what is paid out is outflow Which of the following is true with respect to CFO Ans- an increase in inventory indicates a reduction in CFO NOTE: there is a cost (reduction) to purchasing (increasing) inventory The Statement of Cash Flows is not useful when addressing the financial health of a firm due to the impact of accrual accounting Ans- FALSE - the impact of accrual accounting is seen as MOST useful in relation to net income Which is true with respect to CFF Ans- an increase in notes payable indicates an increase in CFF Which is not a part of the Statement of Cash Flows Ans- cash flows from liquidating activities NOTE: cash flows are operating, investing, and financing The sum of CFO + CFI + CFF is equal to Ans- the change in cash during the period Depreciation expense is a significant source of difference between net income and CFO because Ansdepreciation is a non-cash expense on the Income Statement associated with the acquisition of longterm assets Subordinated bonds Ans- are bonds not backed by collateral For visualization purposes, CFI accounts are generally non-current assets on the bottom of the asset side of the Balance Sheet Ans- TRUE NOTE: CFI is investing in PP&E and is considered long-term assets shown as assets on the Balance Sheet Increases in operating assets and decreases in operating liabilities will Ans- decrease CFO NOTE: an increase in PP&E (assets) consumes operating cash; decreases in equipment (liabilities) also consumes operating cash (CFO) Unsecured loan Ans- has no collateral NOTE: a credit card is an example Assuming no asset disposals, CFI is Ans- the change in Gross PP&E -or- CFI is the change in NET PP&E plus depreciation expense Assuming no asset disposals, depreciation expense is equal to Ans- the change in ACCUMULATED depreciation Assets are financed by Ans- other people's money or equity Dividends are considered Ans- CFF (financing section) A firm with positive CFO should be considered healthy Ans- FALSE NOTE: a positive CFO can still be detrimental to the firm depending on other factor