WGU C214 OA Financial Management Exam
Questions and Answers Updated 2026
(Verified Answers)
Why would the Annual Percentage Yield (APY) be greater than the Annual
Percentage Rate (APR)? - VERIFIED ANSWER- Interest payments are more
frequent than annual.
What determines when revenue is "recognized" on the income statement? -
VERIFIED ANSWER- When the product is shipped or delivered to the customer.
What is the possible bad side-effect of a high sales-to-inventory ratio? -
VERIFIED ANSWER- Lost sales because of lack of inventory.
What type of security can be exchanged for stock? - VERIFIED ANSWER-
Convertible Bond
What are the results of a firm moderately increasing leverage? - VERIFIED
ANSWER- 1. Increased ROE
2. Increased Profit Volatility
3. Decrease in WACC
,What is the goal of the International Financial Reporting Standards (IFRS)? -
VERIFIED ANSWER- Create a uniform set of accounting rules across countries.
What is the difference between Gordon Growth and the Capital Asset Pricing
Model (CAPM)? - VERIFIED ANSWER- Gordon Growth: Conceptual
CAPM: Statistically Measured
How does a good credit rating from S&P and Moody's affect the firm? -
VERIFIED ANSWER- Lowers the cost of financing.
What are the 4 categories of financial ratios? - VERIFIED ANSWER- 1. Liquidity
2. Efficiency
3. Financing
4. Profitability
What are the 3 pitfalls of using financial ratios? - VERIFIED ANSWER- 1. Seasonal
2. Timing
3. Accounting
Which three changes would affect an estimate of differential cash flows? -
VERIFIED ANSWER- b, c, e 1-an increase in the estimated value of the new
machine at the end of the project 2-a revision in the depreciation schedule 3-
an increase in the overhead allocation
,Why is it important to prepare an accurate fixed asset financing forecast? -
VERIFIED ANSWER- firms producing above capacity may nor require additional
fixed asset investment to increase sales
How is the value of a project determined in the capital budgeting process? -
VERIFIED ANSWER- the net present value of the incremental tax cash flows
Company A has a high degree of business risk. What will be the effect on the
company's EBIT if the company suffers a slight decrease in sales? - VERIFIED
ANSWER- large decrease in EBIT
What effect does the method of financing investments have on the value of the
firm? - VERIFIED ANSWER- the method of financing investments alters the
weighted average of the cost of capital
Why would a company prefer equity financing over debt financing? - VERIFIED
ANSWER- using equity to finance a capital investment project is less costly
Which hybrid security has some elements that resemble equity and others that
resemble debt? - VERIFIED ANSWER- treasury stock
How do increases in market interest rates affect a firm's cost of capital? -
VERIFIED ANSWER- the cost of debt of equity increases
, Why does a firm hold cash? - VERIFIED ANSWER- 1. Operating Balance: To meet
its day-to-day needs
2. Reserve Balance: To compensate for the uncertainty associated with its cash
flows
3. To satisfy its bank requirements
What permits the sales of securities without detailed SEC registration? -
VERIFIED ANSWER- Rule 144A (in U.S. markets) and Reg S (in foreign markets).
The market risk premium for stocks is compensation for what? - VERIFIED
ANSWER- Systematic Risk: Risk that cannot be diversified away.
What happens if a firm adopts a project with negative Net Present Value (NPV)?
- VERIFIED ANSWER- Since the value of the firm decreased, the stock price falls.
If a bond's yield is greater than the coupon rate, what is its price? - VERIFIED
ANSWER- Discount Price
What does the Modigliani-Miller (M&M) theory state? - VERIFIED ANSWER- The
debt-equity ratio does not affect WACC.
What does recent evidence say about the M&M theory? - VERIFIED ANSWER- The
debt-equity ratio does effect WACC.
Questions and Answers Updated 2026
(Verified Answers)
Why would the Annual Percentage Yield (APY) be greater than the Annual
Percentage Rate (APR)? - VERIFIED ANSWER- Interest payments are more
frequent than annual.
What determines when revenue is "recognized" on the income statement? -
VERIFIED ANSWER- When the product is shipped or delivered to the customer.
What is the possible bad side-effect of a high sales-to-inventory ratio? -
VERIFIED ANSWER- Lost sales because of lack of inventory.
What type of security can be exchanged for stock? - VERIFIED ANSWER-
Convertible Bond
What are the results of a firm moderately increasing leverage? - VERIFIED
ANSWER- 1. Increased ROE
2. Increased Profit Volatility
3. Decrease in WACC
,What is the goal of the International Financial Reporting Standards (IFRS)? -
VERIFIED ANSWER- Create a uniform set of accounting rules across countries.
What is the difference between Gordon Growth and the Capital Asset Pricing
Model (CAPM)? - VERIFIED ANSWER- Gordon Growth: Conceptual
CAPM: Statistically Measured
How does a good credit rating from S&P and Moody's affect the firm? -
VERIFIED ANSWER- Lowers the cost of financing.
What are the 4 categories of financial ratios? - VERIFIED ANSWER- 1. Liquidity
2. Efficiency
3. Financing
4. Profitability
What are the 3 pitfalls of using financial ratios? - VERIFIED ANSWER- 1. Seasonal
2. Timing
3. Accounting
Which three changes would affect an estimate of differential cash flows? -
VERIFIED ANSWER- b, c, e 1-an increase in the estimated value of the new
machine at the end of the project 2-a revision in the depreciation schedule 3-
an increase in the overhead allocation
,Why is it important to prepare an accurate fixed asset financing forecast? -
VERIFIED ANSWER- firms producing above capacity may nor require additional
fixed asset investment to increase sales
How is the value of a project determined in the capital budgeting process? -
VERIFIED ANSWER- the net present value of the incremental tax cash flows
Company A has a high degree of business risk. What will be the effect on the
company's EBIT if the company suffers a slight decrease in sales? - VERIFIED
ANSWER- large decrease in EBIT
What effect does the method of financing investments have on the value of the
firm? - VERIFIED ANSWER- the method of financing investments alters the
weighted average of the cost of capital
Why would a company prefer equity financing over debt financing? - VERIFIED
ANSWER- using equity to finance a capital investment project is less costly
Which hybrid security has some elements that resemble equity and others that
resemble debt? - VERIFIED ANSWER- treasury stock
How do increases in market interest rates affect a firm's cost of capital? -
VERIFIED ANSWER- the cost of debt of equity increases
, Why does a firm hold cash? - VERIFIED ANSWER- 1. Operating Balance: To meet
its day-to-day needs
2. Reserve Balance: To compensate for the uncertainty associated with its cash
flows
3. To satisfy its bank requirements
What permits the sales of securities without detailed SEC registration? -
VERIFIED ANSWER- Rule 144A (in U.S. markets) and Reg S (in foreign markets).
The market risk premium for stocks is compensation for what? - VERIFIED
ANSWER- Systematic Risk: Risk that cannot be diversified away.
What happens if a firm adopts a project with negative Net Present Value (NPV)?
- VERIFIED ANSWER- Since the value of the firm decreased, the stock price falls.
If a bond's yield is greater than the coupon rate, what is its price? - VERIFIED
ANSWER- Discount Price
What does the Modigliani-Miller (M&M) theory state? - VERIFIED ANSWER- The
debt-equity ratio does not affect WACC.
What does recent evidence say about the M&M theory? - VERIFIED ANSWER- The
debt-equity ratio does effect WACC.
