WGU C214 Financial Management
Exam Study Questions with
Detailed Answers
1. How can a private firm appropriately maximize shareholder value? -
ANSWER By making decisions that keep the control of the business with
the owners
2. An accountants 40 years old with an anticipated retirement age of 70 years
old. The accountant plans to save $6,000 per year at the end of the next 30
years to fund retirement. - ANSWER $336,510
3. An investor deposits $2,000 per year (beginning today) for 10 years in a 4%
interest bearing account. The last cash flow is received 1 year prior to the
end of the tenth year.
What is the investor's future balance after 10 years? - ANSWER $24,973
4. What is the par value (face value) of a bond? - ANSWER The sum of
money that the corporation promises to pay upon expiration of the bond.
5. A broker is considering purchasing common stock in a company that has
average but consistent operating performance.
Which factor should lead the broker to purchase shares in this company? -
ANSWER The current price of the stock is 25% below its intrinsic value.
,6. A broker is considering buying a dividend-paying stock. The dividend will
be paid at the end of the year.
The analyst consensus is the stock will be worth $36 in one year. The company
pays a $2.25 annual dividend (ex dividend date is not a consideration, the
broker will receive the full $2.25), and the broker expects a 12% rate of return
What is the highest price the broker should be willing to pay for the stock? -
ANSWER $34.15
7. A person buys shares of a company at $45. They recently paid a $2 annual
dividend which is expected to grow by 10% per year.
What is the expected return per year? - ANSWER 14.9%
8. Which investment option is less desirable for a prudent investor? -
ANSWER Quadrant 4, bottom left, 3/4 to right side. Also E. for answer.
9. The market rate of return is 9%. The face value ofthe bond is $1000,the
coupon rate is 9% with annual
compounding, and the bond matures in 10 years.
What is the value of the bond? - ANSWER $1,000
10.Which statement is true about fluctuations in bond prices? - ANSWER
When the market interest rates fluctuate, the required rate of return equals
the bond coupon rate.
,11.A company issues bonds at a market price of $925. The face value is $1,000.
The bonds mature in 10 years, and the coupon rate is 6% compounded
semiannually.
What is the yield to maturity (YTM) on the company's bonds? - ANSWER
7.06%
12.Which securities are issued by local governments and are usually tax exempt
at the federal level? - ANSWER Municipal bonds
13.A bond pays $27.50 semiannually, matures in 9 years, and is currently
priced at $1,090.
What is the yield to maturity for this bond? - ANSWER 4.28%
A bond that matures in 30 months is sold at a premium.
14.What is the yield to maturity (YTM)? - ANSWER Lower than the coupon
rate
15.Why does a long-term bond resemble an interest-only loan? - ANSWER
None of the principle is repaid until the bond matures.
16.Under which circumstances will annual percentage yield (APY) be greater
than the annual percentage rate
(APR)? - ANSWER Any time the number of compounding periods is greater
than annual.
, 17.What is the difference between a common stock and a preferred stock? -
ANSWER Skipping a declared preferred stock dividend results in dividends
in arrears.
18.Which happens to the risk level in a portfolio as the number of assets in the
portfolio increases? - ANSWER Risk decreases at a slower rate.
19.Where along this line will a highly risk-averse investor likely fall? -
ANSWER C1 - Three up vertical on the graph curve and also that would be
on the most arched part of the graph.
20.What are two primary benefits of the capital asset pricing model (CAPM)? -
ANSWER CAPM provides a way to determine the expected return for
stocks. & CAPM provides a way to estimate the required return.
21.A company has a before-tax cost of common equity of 14%, a pre-tax cost of
debt 6%, a cost of preferred
equity 8%, and a marginaltax rate of 34%. The current market value ofthe
company is $150 million, with
$75 million common equity, $50 million debt, and $25 million preferred equity.
What is the company's weighted average cost of capital? - ANSWER 9.7%
22.Which two techniques would be considered effective ways to manage the
growth of a firm, if additional financing is not available? - ANSWER
Increase sales prices and Alter capacity
23.Partial financial data for a company is as follows:
Assets: $10,000,000
Exam Study Questions with
Detailed Answers
1. How can a private firm appropriately maximize shareholder value? -
ANSWER By making decisions that keep the control of the business with
the owners
2. An accountants 40 years old with an anticipated retirement age of 70 years
old. The accountant plans to save $6,000 per year at the end of the next 30
years to fund retirement. - ANSWER $336,510
3. An investor deposits $2,000 per year (beginning today) for 10 years in a 4%
interest bearing account. The last cash flow is received 1 year prior to the
end of the tenth year.
What is the investor's future balance after 10 years? - ANSWER $24,973
4. What is the par value (face value) of a bond? - ANSWER The sum of
money that the corporation promises to pay upon expiration of the bond.
5. A broker is considering purchasing common stock in a company that has
average but consistent operating performance.
Which factor should lead the broker to purchase shares in this company? -
ANSWER The current price of the stock is 25% below its intrinsic value.
,6. A broker is considering buying a dividend-paying stock. The dividend will
be paid at the end of the year.
The analyst consensus is the stock will be worth $36 in one year. The company
pays a $2.25 annual dividend (ex dividend date is not a consideration, the
broker will receive the full $2.25), and the broker expects a 12% rate of return
What is the highest price the broker should be willing to pay for the stock? -
ANSWER $34.15
7. A person buys shares of a company at $45. They recently paid a $2 annual
dividend which is expected to grow by 10% per year.
What is the expected return per year? - ANSWER 14.9%
8. Which investment option is less desirable for a prudent investor? -
ANSWER Quadrant 4, bottom left, 3/4 to right side. Also E. for answer.
9. The market rate of return is 9%. The face value ofthe bond is $1000,the
coupon rate is 9% with annual
compounding, and the bond matures in 10 years.
What is the value of the bond? - ANSWER $1,000
10.Which statement is true about fluctuations in bond prices? - ANSWER
When the market interest rates fluctuate, the required rate of return equals
the bond coupon rate.
,11.A company issues bonds at a market price of $925. The face value is $1,000.
The bonds mature in 10 years, and the coupon rate is 6% compounded
semiannually.
What is the yield to maturity (YTM) on the company's bonds? - ANSWER
7.06%
12.Which securities are issued by local governments and are usually tax exempt
at the federal level? - ANSWER Municipal bonds
13.A bond pays $27.50 semiannually, matures in 9 years, and is currently
priced at $1,090.
What is the yield to maturity for this bond? - ANSWER 4.28%
A bond that matures in 30 months is sold at a premium.
14.What is the yield to maturity (YTM)? - ANSWER Lower than the coupon
rate
15.Why does a long-term bond resemble an interest-only loan? - ANSWER
None of the principle is repaid until the bond matures.
16.Under which circumstances will annual percentage yield (APY) be greater
than the annual percentage rate
(APR)? - ANSWER Any time the number of compounding periods is greater
than annual.
, 17.What is the difference between a common stock and a preferred stock? -
ANSWER Skipping a declared preferred stock dividend results in dividends
in arrears.
18.Which happens to the risk level in a portfolio as the number of assets in the
portfolio increases? - ANSWER Risk decreases at a slower rate.
19.Where along this line will a highly risk-averse investor likely fall? -
ANSWER C1 - Three up vertical on the graph curve and also that would be
on the most arched part of the graph.
20.What are two primary benefits of the capital asset pricing model (CAPM)? -
ANSWER CAPM provides a way to determine the expected return for
stocks. & CAPM provides a way to estimate the required return.
21.A company has a before-tax cost of common equity of 14%, a pre-tax cost of
debt 6%, a cost of preferred
equity 8%, and a marginaltax rate of 34%. The current market value ofthe
company is $150 million, with
$75 million common equity, $50 million debt, and $25 million preferred equity.
What is the company's weighted average cost of capital? - ANSWER 9.7%
22.Which two techniques would be considered effective ways to manage the
growth of a firm, if additional financing is not available? - ANSWER
Increase sales prices and Alter capacity
23.Partial financial data for a company is as follows:
Assets: $10,000,000
