WGU C214 Financial Management OA
Actual exam COMPREHENSIVE
QUESTIONS AND VERIFIED ANSWERS
PLUS RATIONALES || GRADED A+||
LATEST UPDATE 2026
1) Which action increases Net Present Value (NPV) the most, holding cash flows
constant?
A. Increase discount rate
B. Decrease discount rate
C. Shorten project life
D. Increase initial investment
Correct: B
Rationale: Lower discount rates raise present values of future cash flows, increasing NPV.
2) A project has IRR of 12%. The firm’s WACC is 10%. What should
management do?
A. Reject
B. Accept
C. Indifferent
D. Defer
Correct: B
Rationale: Accept projects with IRR > WACC.
3) Which metric can be misleading when comparing mutually exclusive projects
of different scale?
A. NPV
B. IRR
,C. Payback
D. Profitability Index
Correct: B
Rationale: IRR can rank incorrectly when projects differ in size/timing; NPV is superior.
4) If WACC increases, what happens to project NPVs (all else equal)?
A. Increase
B. Decrease
C. No change
D. Become negative only for short projects
Correct: B
Rationale: Higher discount rates reduce present values.
5) Which cash flow is excluded from capital budgeting?
A. Initial outlay
B. Operating cash flows
C. Sunk costs
D. Terminal value
Correct: C
Rationale: Sunk costs are irrelevant to future decisions.
6) Which is a relevant incremental cash flow?
A. Depreciation expense (book)
B. Opportunity cost of using owned land
C. Allocated overhead
D. Historical research costs
Correct: B
Rationale: Opportunity costs are relevant; sunk/allocated costs are not (unless truly
incremental).
7) The primary goal of financial management is to:
,A. Maximize EPS
B. Minimize taxes
C. Maximize shareholder value
D. Maximize revenue
Correct: C
Rationale: Finance focuses on value creation for owners.
8) Which risk is diversified away in a broad portfolio?
A. Systematic risk
B. Market risk
C. Unsystematic risk
D. Interest rate risk
Correct: C
Rationale: Firm-specific risk is diversifiable.
9) A higher beta implies:
A. Lower expected return
B. Lower systematic risk
C. Higher sensitivity to market movements
D. No change in risk
Correct: C
Rationale: Beta measures market sensitivity.
10) According to CAPM, expected return depends on:
A. Risk-free rate, beta, market risk premium
B. Dividend yield only
C. Accounting return
D. Total risk only
Correct: A
Rationale: CAPM: E(R)=Rf+β(Rm−Rf)E(R)=R_f+\beta(R_m-R_f)E(R)=Rf+β(Rm−Rf).
, 11) Which factor reduces WACC?
A. Higher cost of debt
B. Higher tax rate (ceteris paribus)
C. Higher equity risk premium
D. More expensive equity
Correct: B
Rationale: Interest is tax-deductible; higher tax rate increases the tax shield.
12) Increasing financial leverage generally:
A. Decreases equity risk
B. Decreases ROE volatility
C. Increases equity risk and ROE volatility
D. Has no effect
Correct: C
Rationale: Leverage magnifies risk/returns to equity.
13) Which is not a component of WACC?
A. After-tax cost of debt
B. Cost of preferred stock
C. Cost of equity
D. Cost of retained earnings recorded as expense
Correct: D
Rationale: Retained earnings have an opportunity cost (cost of equity), not an accounting
expense line item.
14) The payback method is weak because it:
A. Ignores time value of money
B. Ignores cash flows after cutoff
C. Lacks an objective decision rule tied to value
D. All of the above
Correct: D
Rationale: All listed limitations apply.
Actual exam COMPREHENSIVE
QUESTIONS AND VERIFIED ANSWERS
PLUS RATIONALES || GRADED A+||
LATEST UPDATE 2026
1) Which action increases Net Present Value (NPV) the most, holding cash flows
constant?
A. Increase discount rate
B. Decrease discount rate
C. Shorten project life
D. Increase initial investment
Correct: B
Rationale: Lower discount rates raise present values of future cash flows, increasing NPV.
2) A project has IRR of 12%. The firm’s WACC is 10%. What should
management do?
A. Reject
B. Accept
C. Indifferent
D. Defer
Correct: B
Rationale: Accept projects with IRR > WACC.
3) Which metric can be misleading when comparing mutually exclusive projects
of different scale?
A. NPV
B. IRR
,C. Payback
D. Profitability Index
Correct: B
Rationale: IRR can rank incorrectly when projects differ in size/timing; NPV is superior.
4) If WACC increases, what happens to project NPVs (all else equal)?
A. Increase
B. Decrease
C. No change
D. Become negative only for short projects
Correct: B
Rationale: Higher discount rates reduce present values.
5) Which cash flow is excluded from capital budgeting?
A. Initial outlay
B. Operating cash flows
C. Sunk costs
D. Terminal value
Correct: C
Rationale: Sunk costs are irrelevant to future decisions.
6) Which is a relevant incremental cash flow?
A. Depreciation expense (book)
B. Opportunity cost of using owned land
C. Allocated overhead
D. Historical research costs
Correct: B
Rationale: Opportunity costs are relevant; sunk/allocated costs are not (unless truly
incremental).
7) The primary goal of financial management is to:
,A. Maximize EPS
B. Minimize taxes
C. Maximize shareholder value
D. Maximize revenue
Correct: C
Rationale: Finance focuses on value creation for owners.
8) Which risk is diversified away in a broad portfolio?
A. Systematic risk
B. Market risk
C. Unsystematic risk
D. Interest rate risk
Correct: C
Rationale: Firm-specific risk is diversifiable.
9) A higher beta implies:
A. Lower expected return
B. Lower systematic risk
C. Higher sensitivity to market movements
D. No change in risk
Correct: C
Rationale: Beta measures market sensitivity.
10) According to CAPM, expected return depends on:
A. Risk-free rate, beta, market risk premium
B. Dividend yield only
C. Accounting return
D. Total risk only
Correct: A
Rationale: CAPM: E(R)=Rf+β(Rm−Rf)E(R)=R_f+\beta(R_m-R_f)E(R)=Rf+β(Rm−Rf).
, 11) Which factor reduces WACC?
A. Higher cost of debt
B. Higher tax rate (ceteris paribus)
C. Higher equity risk premium
D. More expensive equity
Correct: B
Rationale: Interest is tax-deductible; higher tax rate increases the tax shield.
12) Increasing financial leverage generally:
A. Decreases equity risk
B. Decreases ROE volatility
C. Increases equity risk and ROE volatility
D. Has no effect
Correct: C
Rationale: Leverage magnifies risk/returns to equity.
13) Which is not a component of WACC?
A. After-tax cost of debt
B. Cost of preferred stock
C. Cost of equity
D. Cost of retained earnings recorded as expense
Correct: D
Rationale: Retained earnings have an opportunity cost (cost of equity), not an accounting
expense line item.
14) The payback method is weak because it:
A. Ignores time value of money
B. Ignores cash flows after cutoff
C. Lacks an objective decision rule tied to value
D. All of the above
Correct: D
Rationale: All listed limitations apply.
