2026 WGU C214 FINANCIAL
MANAGEMENT: COMPLETE EXAM
GUIDE WITH 80 VERIFIED QUESTIONS
& RATIONALES
1. Characteristics of preferred stock includes -
ANSWER -
• 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)
Rationale: Preferred stock combines features of both debt and equity. It has
priority over common stock in dividend payments and bankruptcy claims but
typically does not carry voting rights. The cumulative feature allows missed
dividends to accumulate as dividends in arrears.
2. Preferred stock dividends -
ANSWER -
• can go without payment and pay in arrears the following year
,Rationale: Unlike bond interest payments which are legally required, preferred
stock dividends can be skipped without causing bankruptcy. However, if the stock
is cumulative, any missed dividends must be paid before common stockholders
can receive dividends.
3. Characteristics of common stock are -
ANSWER -
• 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
Rationale: Common stock represents true ownership in a corporation.
Shareholders have voting rights and potential for unlimited upside through
dividends and capital appreciation, but they are last in line for claims in
bankruptcy after creditors and preferred stockholders.
4. New start up ventures often issue -
ANSWER -
• preferred stock (in an IPO)
Rationale: Startups frequently issue preferred stock to attract investors who want
priority in dividend payments and bankruptcy claims while also having potential
for equity upside. It provides a balance of safety and growth potential for early-
stage investors.
,5. What stock is considered a hybrid -
ANSWER -
• preferred stock
Rationale: Preferred stock is considered hybrid security because it combines
features of both common stock (ownership, dividend potential) and bonds (fixed
dividend payments, priority claim). It behaves like a bond with its fixed payments
but represents equity ownership.
6. One thing common stock and preferred stock have in common is -
ANSWER -
• both have no maturity date
Rationale: Unlike bonds which have a fixed maturity date when principal must be
repaid, both common and preferred stock represent permanent equity capital
with no obligation for the company to redeem them. They remain outstanding
indefinitely unless the company chooses to repurchase them.
7. Which type of security has voting rights -
ANSWER -
• common stock
Rationale: Common stockholders elect the board of directors and vote on major
corporate matters such as mergers, acquisitions, and charter amendments.
Preferred stockholders typically do not have voting rights unless the company fails
to pay preferred dividends for a specified period.
8. Debt covenants and restrictions help to ensure that -
ANSWER -
• management is meeting bond and shareholder expectations
, • NOTE: covenants are promises meant to be kept
Rationale: Debt covenants are protective provisions in bond indentures that
restrict certain activities of the borrower. They help align management behavior
with creditor interests by limiting additional borrowing, requiring minimum
financial ratios, and restricting dividend payments, thereby reducing default risk.
9. The cost of debt is typically ________ than the cost of equity because -
ANSWER -
• lower
• debt has优先 claim on cash flows and assets
• interest payments are tax-deductible (tax shield)
• less risky for investors
Rationale: Debt is less risky for investors because interest must be paid before
dividends, and bondholders have priority in bankruptcy. Additionally, the tax
deductibility of interest lowers the effective cost to the company, making debt
cheaper than equity.
10. The weighted average cost of capital (WACC) represents -
ANSWER -
• the average return required by all investors (debt and equity)
• the minimum return a company must earn on its investments
• the discount rate used for project evaluation
• the hurdle rate for capital budgeting decisions
Rationale: WACC is the blended cost of each component of capital weighted by its
proportion in the capital structure. It represents the overall opportunity cost of
funds and serves as the minimum acceptable return for new investments to
maintain shareholder value.
MANAGEMENT: COMPLETE EXAM
GUIDE WITH 80 VERIFIED QUESTIONS
& RATIONALES
1. Characteristics of preferred stock includes -
ANSWER -
• 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)
Rationale: Preferred stock combines features of both debt and equity. It has
priority over common stock in dividend payments and bankruptcy claims but
typically does not carry voting rights. The cumulative feature allows missed
dividends to accumulate as dividends in arrears.
2. Preferred stock dividends -
ANSWER -
• can go without payment and pay in arrears the following year
,Rationale: Unlike bond interest payments which are legally required, preferred
stock dividends can be skipped without causing bankruptcy. However, if the stock
is cumulative, any missed dividends must be paid before common stockholders
can receive dividends.
3. Characteristics of common stock are -
ANSWER -
• 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
Rationale: Common stock represents true ownership in a corporation.
Shareholders have voting rights and potential for unlimited upside through
dividends and capital appreciation, but they are last in line for claims in
bankruptcy after creditors and preferred stockholders.
4. New start up ventures often issue -
ANSWER -
• preferred stock (in an IPO)
Rationale: Startups frequently issue preferred stock to attract investors who want
priority in dividend payments and bankruptcy claims while also having potential
for equity upside. It provides a balance of safety and growth potential for early-
stage investors.
,5. What stock is considered a hybrid -
ANSWER -
• preferred stock
Rationale: Preferred stock is considered hybrid security because it combines
features of both common stock (ownership, dividend potential) and bonds (fixed
dividend payments, priority claim). It behaves like a bond with its fixed payments
but represents equity ownership.
6. One thing common stock and preferred stock have in common is -
ANSWER -
• both have no maturity date
Rationale: Unlike bonds which have a fixed maturity date when principal must be
repaid, both common and preferred stock represent permanent equity capital
with no obligation for the company to redeem them. They remain outstanding
indefinitely unless the company chooses to repurchase them.
7. Which type of security has voting rights -
ANSWER -
• common stock
Rationale: Common stockholders elect the board of directors and vote on major
corporate matters such as mergers, acquisitions, and charter amendments.
Preferred stockholders typically do not have voting rights unless the company fails
to pay preferred dividends for a specified period.
8. Debt covenants and restrictions help to ensure that -
ANSWER -
• management is meeting bond and shareholder expectations
, • NOTE: covenants are promises meant to be kept
Rationale: Debt covenants are protective provisions in bond indentures that
restrict certain activities of the borrower. They help align management behavior
with creditor interests by limiting additional borrowing, requiring minimum
financial ratios, and restricting dividend payments, thereby reducing default risk.
9. The cost of debt is typically ________ than the cost of equity because -
ANSWER -
• lower
• debt has优先 claim on cash flows and assets
• interest payments are tax-deductible (tax shield)
• less risky for investors
Rationale: Debt is less risky for investors because interest must be paid before
dividends, and bondholders have priority in bankruptcy. Additionally, the tax
deductibility of interest lowers the effective cost to the company, making debt
cheaper than equity.
10. The weighted average cost of capital (WACC) represents -
ANSWER -
• the average return required by all investors (debt and equity)
• the minimum return a company must earn on its investments
• the discount rate used for project evaluation
• the hurdle rate for capital budgeting decisions
Rationale: WACC is the blended cost of each component of capital weighted by its
proportion in the capital structure. It represents the overall opportunity cost of
funds and serves as the minimum acceptable return for new investments to
maintain shareholder value.
