WGU D775 BUSINESS FINANCE OA FINAL
TEST 2026 QUESTIONS WITH CORRECT
ANSWERS GRADED A+
◍ Rising CPI (consumer price index) indicates?.
Answer: Increasing costs for raw materials, labor, and other inputs, which
can erode profit margins if businesses are unable to pass these increased
costs onto consumers through higher prices.- For instance, a company
producing consumer goods may face higher production costs if the CPI
indicates significant inflation. This company must decide whether to absorb
these costs, potentially reducing profitability, or to increase prices, which
might reduce consumer demand. Moreover, inflation affects wage
expectations, with employees demanding higher wages to keep up with
rising living costs. Therefore, businesses must carefully monitor the CPI to
manage pricing strategies, wage negotiations, and cost control measures
effectively.
◍ What is the Annual Interest Rate aka (APR).
Answer: The annualized cost of borrowing or the yearly interest rate charged
on a loan or credit balance
◍ What are Preferred stock "hybrid stocks"?.
Answer: A class of ownership in a corporation that has a higher claim on
assets and earning- No voting rights-Fixed dividends- Have a higher claim
on earnings -Normally Utility companies or start ups that are funded by
private investors - Recorded under the owner equity portion of the balance
sheet and is relatively rare in publicly traded stocks.- Has characteristics of
both common stock and bonds- Firms really want to pay their common
dividends, or their stock price takes a big hit
◍ What are types of Time Value Of Money (TVM).
, Answer: Compounding and Discounting
◍ Legal dilemmas in finance include:.
Answer: Tax avoidance, when companies exploit loopholes to minimize tax
liabilities legally but unethically.- For instance, some multinational
corporations use transfer pricing and offshore tax havens to shift profits and
reduce tax burdens, depriving governments of revenue needed for public
services.
◍ What are the two main types of financial management?.
Answer: Accounting (past) and Finance (future).
◍ Describe equity financing.
Answer: - Selling shares or giving equity holders (more commonly called
shareholders) ownership stakes but no guaranteed repayments. -
Shareholders benefit from profits through dividends and the potential
increases in the overall value of the company, but they do not have claims
on the firm's assets if the company fails to generate returns.
◍ What is Future Value (FV).
Answer: The amount you repaid in the future
◍ What is annuity and what can it be used for?.
Answer: A financial arrangement in which a series of equal payments is
made or received at regular intervals over a specified period of time. - Can
be used for various purposes, such as repaying loans, saving for retirement,
or receiving periodic payments from an investment.- It has two
characteristics: 1) all payments are the same size and 2) all payments are
equally spaced (such as monthly or yearly).
◍ How to interpret Profitability Ratios.
Answer: - High profitability ratios generally indicate strong financial
performance and operational efficiency, making a company more attractive
to investors. - However, these ratios should be analyzed in conjunction with
other financial metrics and external factors, such as economic conditions
and industry trends, to gain a comprehensive understanding of a company's
, profitability.Example: the three profitability ratios are lower for XYZ than
the average ratios for XYZ's competitors. This first observation might signal
that XYZ has some work to do if it wants to effectively manage its assets by
improving profitability and reducing costs to increase its margins. Second,
as we study the time series of these ratios for XYZ, we notice that the ROA,
ROE, and profit margin have been increasing over the past several years.
This is also an important observation and indicates that XYZ is heading in
the right direction but may have some additional work to do when catching
up to its competitors.
◍ What is the present value of annuity (PVA).
Answer: - The current worth of a series of equal payments made at regular
intervals, discounted at a specific interest rate. The PVA calculates how
much a future stream of payments is worth today, accounting for the time
value of money. - It is commonly used to determine how much money needs
to be invested now to generate a series of future payments or to evaluate the
worth of income streams from investments or loans.
◍ Describes Current, Fixed and Total Assets:.
Answer: Current Assets:1) Cash2) Inventory3) Receivables Fixed Assets:
PP&E1) Property2) Plant3) EquipmentThe amount of fixed assets is
generally calculated as the amount of PP&E minus the amount that these
assets have been depreciated.-Total Assets: are the sum of current and fixed
assets
◍ What does the interest rate depend on?.
Answer: 1. The riskiness of the borrower. When obtaining a small business
loan, the bank will determine default risk of a particular loan. Default risk
can be defined as the likelihood that a loan will not be paid back to the bank.
The riskier the borrower, the higher the interest rate. The bank will need to
be better compensated for providing capital to riskier borrowers.2. The
length of the loan. What is riskier—a loan that will be paid back in one year
or a loan that will be paid back in 10 years? Hopefully, you said the 10-year
loan. Think about it. As the length of a loan increases, the greater the
, probability that some crisis occurs and results in higher default risk.3. The
frequency of payments. When payments to the bank are made more
frequently, banks are more likely to retrieve the money that they lent out.
This makes loans less risky, and interest rates might subsequently lower.
◍ Comparison between common and preferred stock.
Answer: - Common stock: offer the potential for higher returns and voting
rights but come with greater risk due to their lower priority in claims on
assets- Preferred stock: provide more stability with fixed dividends and
higher priority in asset claims but usually lack voting rights, offering less
control over corporate governance.
◍ Describe public bonds:.
Answer: - Bonds issued by government entities to finance public projects
and operations -Often considered low risk - Two types of bonds: Municipal
and treasury
◍ What is the purpose for Gross Domestic Product (GDP)?.
Answer: - Key measure of economic performance- Represents the total
value of all goods and services produced within a country over a specific
period.- High GDP: GDP growth signals an expanding economy, which
typically translates to increased consumer spending, higher demand for
products and services, and potential for revenue growth.- Lower GDP:
indicates an economic contraction, leading to reduced consumer spending
and potentially lower business revenues.Example: During periods of strong
GDP growth, companies might expand production, hire more employees,
and invest in new projects. During economic downturns, firms may scale
back operations, delay expansion plans, and focus on cost-saving measures
such as downsizing employees. Thus, GDP not only reflects the economic
environment in which businesses operate but also influences corporate
decision-making.
◍ What are the two Activity Ratios?.
Answer: - Total Asset Turnover Ratio - Fixed Asset Turnover Ratio
◍ What does Book Value mean?.
TEST 2026 QUESTIONS WITH CORRECT
ANSWERS GRADED A+
◍ Rising CPI (consumer price index) indicates?.
Answer: Increasing costs for raw materials, labor, and other inputs, which
can erode profit margins if businesses are unable to pass these increased
costs onto consumers through higher prices.- For instance, a company
producing consumer goods may face higher production costs if the CPI
indicates significant inflation. This company must decide whether to absorb
these costs, potentially reducing profitability, or to increase prices, which
might reduce consumer demand. Moreover, inflation affects wage
expectations, with employees demanding higher wages to keep up with
rising living costs. Therefore, businesses must carefully monitor the CPI to
manage pricing strategies, wage negotiations, and cost control measures
effectively.
◍ What is the Annual Interest Rate aka (APR).
Answer: The annualized cost of borrowing or the yearly interest rate charged
on a loan or credit balance
◍ What are Preferred stock "hybrid stocks"?.
Answer: A class of ownership in a corporation that has a higher claim on
assets and earning- No voting rights-Fixed dividends- Have a higher claim
on earnings -Normally Utility companies or start ups that are funded by
private investors - Recorded under the owner equity portion of the balance
sheet and is relatively rare in publicly traded stocks.- Has characteristics of
both common stock and bonds- Firms really want to pay their common
dividends, or their stock price takes a big hit
◍ What are types of Time Value Of Money (TVM).
, Answer: Compounding and Discounting
◍ Legal dilemmas in finance include:.
Answer: Tax avoidance, when companies exploit loopholes to minimize tax
liabilities legally but unethically.- For instance, some multinational
corporations use transfer pricing and offshore tax havens to shift profits and
reduce tax burdens, depriving governments of revenue needed for public
services.
◍ What are the two main types of financial management?.
Answer: Accounting (past) and Finance (future).
◍ Describe equity financing.
Answer: - Selling shares or giving equity holders (more commonly called
shareholders) ownership stakes but no guaranteed repayments. -
Shareholders benefit from profits through dividends and the potential
increases in the overall value of the company, but they do not have claims
on the firm's assets if the company fails to generate returns.
◍ What is Future Value (FV).
Answer: The amount you repaid in the future
◍ What is annuity and what can it be used for?.
Answer: A financial arrangement in which a series of equal payments is
made or received at regular intervals over a specified period of time. - Can
be used for various purposes, such as repaying loans, saving for retirement,
or receiving periodic payments from an investment.- It has two
characteristics: 1) all payments are the same size and 2) all payments are
equally spaced (such as monthly or yearly).
◍ How to interpret Profitability Ratios.
Answer: - High profitability ratios generally indicate strong financial
performance and operational efficiency, making a company more attractive
to investors. - However, these ratios should be analyzed in conjunction with
other financial metrics and external factors, such as economic conditions
and industry trends, to gain a comprehensive understanding of a company's
, profitability.Example: the three profitability ratios are lower for XYZ than
the average ratios for XYZ's competitors. This first observation might signal
that XYZ has some work to do if it wants to effectively manage its assets by
improving profitability and reducing costs to increase its margins. Second,
as we study the time series of these ratios for XYZ, we notice that the ROA,
ROE, and profit margin have been increasing over the past several years.
This is also an important observation and indicates that XYZ is heading in
the right direction but may have some additional work to do when catching
up to its competitors.
◍ What is the present value of annuity (PVA).
Answer: - The current worth of a series of equal payments made at regular
intervals, discounted at a specific interest rate. The PVA calculates how
much a future stream of payments is worth today, accounting for the time
value of money. - It is commonly used to determine how much money needs
to be invested now to generate a series of future payments or to evaluate the
worth of income streams from investments or loans.
◍ Describes Current, Fixed and Total Assets:.
Answer: Current Assets:1) Cash2) Inventory3) Receivables Fixed Assets:
PP&E1) Property2) Plant3) EquipmentThe amount of fixed assets is
generally calculated as the amount of PP&E minus the amount that these
assets have been depreciated.-Total Assets: are the sum of current and fixed
assets
◍ What does the interest rate depend on?.
Answer: 1. The riskiness of the borrower. When obtaining a small business
loan, the bank will determine default risk of a particular loan. Default risk
can be defined as the likelihood that a loan will not be paid back to the bank.
The riskier the borrower, the higher the interest rate. The bank will need to
be better compensated for providing capital to riskier borrowers.2. The
length of the loan. What is riskier—a loan that will be paid back in one year
or a loan that will be paid back in 10 years? Hopefully, you said the 10-year
loan. Think about it. As the length of a loan increases, the greater the
, probability that some crisis occurs and results in higher default risk.3. The
frequency of payments. When payments to the bank are made more
frequently, banks are more likely to retrieve the money that they lent out.
This makes loans less risky, and interest rates might subsequently lower.
◍ Comparison between common and preferred stock.
Answer: - Common stock: offer the potential for higher returns and voting
rights but come with greater risk due to their lower priority in claims on
assets- Preferred stock: provide more stability with fixed dividends and
higher priority in asset claims but usually lack voting rights, offering less
control over corporate governance.
◍ Describe public bonds:.
Answer: - Bonds issued by government entities to finance public projects
and operations -Often considered low risk - Two types of bonds: Municipal
and treasury
◍ What is the purpose for Gross Domestic Product (GDP)?.
Answer: - Key measure of economic performance- Represents the total
value of all goods and services produced within a country over a specific
period.- High GDP: GDP growth signals an expanding economy, which
typically translates to increased consumer spending, higher demand for
products and services, and potential for revenue growth.- Lower GDP:
indicates an economic contraction, leading to reduced consumer spending
and potentially lower business revenues.Example: During periods of strong
GDP growth, companies might expand production, hire more employees,
and invest in new projects. During economic downturns, firms may scale
back operations, delay expansion plans, and focus on cost-saving measures
such as downsizing employees. Thus, GDP not only reflects the economic
environment in which businesses operate but also influences corporate
decision-making.
◍ What are the two Activity Ratios?.
Answer: - Total Asset Turnover Ratio - Fixed Asset Turnover Ratio
◍ What does Book Value mean?.
