WGU D774 OBJECTIVE ASSESSEMENT FINAL VERSION 2
/WGU D774 INTRODUCTION TO BUSINESS OA EXAM —
159 Questions and Answers Already Graded A+ Premium Exam
Tested And Verified
Page 1
,1. A multinational corporation is considering a strategic move to shift its
manufacturing operations from a high-cost developed country to a lower-cost
developing nation. Which of the following macroeconomic factors would most
critically undermine the expected cost advantages if not properly anticipated?
Answer: Fluctuations in exchange rates that could increase the cost of imported
raw materials
Exchange rate fluctuations can directly erode cost savings by increasing the local
currency cost of imported inputs or reducing the value of repatriated profits. While
labor productivity and regulations matter, exchange rate volatility is often the most
unpredictable and can rapidly negate labor cost advantages. Tax rates are typically
lower in developing countries, not higher.
2. In the context of Porter's Five Forces, a company with a highly differentiated
product that enjoys strong brand loyalty is most likely to experience which of the
following effects on industry competition?
Answer: Reduced bargaining power of buyers because customers are less
price-sensitive
Strong brand loyalty reduces customers' willingness to switch, decreasing their price
sensitivity and bargaining power. While differentiation can create barriers to entry, it
does not increase the threat of new entrants; it decreases it. Rivalry may increase due to
imitation, but the primary effect on buyers is more direct. Substitutes remain a threat
unless the differentiation is truly unique.
3. A company's balance sheet shows total assets of $10 million, total liabilities of $6
million, and shareholders' equity of $4 million. If the company issues $1 million in
new common stock and uses the proceeds to repay a $1 million bank loan, what is the
immediate effect on the debt-to-equity ratio?
Answer: Decreases from 1.5 to 1.0
Initially, debt = $6 million, equity = $4 million, ratio = 6/4 = 1.5. After issuing stock,
equity increases to $5 million; repaying loan reduces debt to $5 million. New ratio = 5/5
= 1.0. Thus the ratio decreases from 1.5 to 1.0.
Page 2
,4. Which of the following scenarios best illustrates the concept of 'moral hazard' in
the context of corporate governance?
Answer: A manager takes excessive risks because his compensation is tied to
short-term profits and he will not bear the downside losses
Moral hazard occurs when one party takes on more risk because they do not bear the
full consequences of that risk. Option A describes a manager who benefits from
high-risk strategies but is insulated from losses, a classic moral hazard. Option B is a
conflict of interest, not necessarily moral hazard. Option C is a market reaction. Option
D is theft.
5. A firm is considering two mutually exclusive projects. Project A has an initial
investment of $100,000 and is expected to generate cash flows of $30,000 per year for
5 years. Project B requires an initial investment of $150,000 and will generate
$50,000 per year for 4 years. The cost of capital is 10%. Using the net present value
(NPV) method, which project should be chosen?
Answer: Project B because it has a higher NPV
NPV of A = -100,000 + 30,000 * PVIFA(10%,5) = -100,000 + 30,000 * 3.7908 = -100,000
+ 113,724 = $13,724. NPV of B = -150,000 + 50,000 * PVIFA(10%,4) = -150,000 + 50,000
* 3.1699 = -150,000 + 158,495 = $8,495. Project A has a higher NPV ($13,724 > $8,495),
so A should be chosen. Option A is correct.
6. Which of the following is a key difference between a corporation and a limited
liability company (LLC)?
Answer: A corporation is subject to double taxation on profits, while an LLC can
avoid double taxation by being taxed as a partnership
Corporations are taxed at the corporate level and again when dividends are distributed
to shareholders (double taxation). LLCs can elect to be taxed as a partnership, where
income passes through to owners and is taxed only once. Option A is false because both
offer limited liability. Option B is false; S-corporations have a 100-shareholder limit,
but regular corporations do not. Option D is true but not a key difference, as LLCs can
also issue membership interests.
Page 3
, 7. In the context of international trade, which of the following is an example of a
non-tariff barrier?
Answer: A quota limiting the number of foreign cars that can be imported
annually
A quota is a quantitative restriction on imports, which is a non-tariff barrier. Option A
is a tariff. Option C is a subsidy, which can distort trade but is not a barrier to imports.
Option D is an export tax, which affects exports, not imports.
8. Which of the following best describes the 'agency problem' in corporate finance?
Answer: Conflicts of interest between managers and shareholders
The agency problem refers to the conflict of interest between principals (shareholders)
and agents (managers) when managers act in their own self-interest rather than
maximizing shareholder wealth. Option A is a different conflict
(bondholder-shareholder). Options C and D are not standard definitions.
9. A company has a current ratio of 2.0 and a quick ratio of 1.0. If the company uses
cash to purchase inventory, what is the effect on these ratios?
Answer: Current ratio remains the same, quick ratio decreases
Current ratio = current assets / current liabilities; quick ratio = (current assets -
inventory) / current liabilities. Using cash to buy inventory reduces cash (current asset)
and increases inventory (current asset), leaving current assets unchanged, so current
ratio stays the same. However, quick assets (cash) decrease, so quick ratio decreases.
10. Which of the following is a characteristic of a perfectly competitive market?
Answer: Firms are price takers
In perfect competition, many small firms sell identical products, and no single firm can
influence the market price; they are price takers. Options A, B, and D describe
monopolistic competition, oligopoly, and monopoly, respectively.
Page 4
/WGU D774 INTRODUCTION TO BUSINESS OA EXAM —
159 Questions and Answers Already Graded A+ Premium Exam
Tested And Verified
Page 1
,1. A multinational corporation is considering a strategic move to shift its
manufacturing operations from a high-cost developed country to a lower-cost
developing nation. Which of the following macroeconomic factors would most
critically undermine the expected cost advantages if not properly anticipated?
Answer: Fluctuations in exchange rates that could increase the cost of imported
raw materials
Exchange rate fluctuations can directly erode cost savings by increasing the local
currency cost of imported inputs or reducing the value of repatriated profits. While
labor productivity and regulations matter, exchange rate volatility is often the most
unpredictable and can rapidly negate labor cost advantages. Tax rates are typically
lower in developing countries, not higher.
2. In the context of Porter's Five Forces, a company with a highly differentiated
product that enjoys strong brand loyalty is most likely to experience which of the
following effects on industry competition?
Answer: Reduced bargaining power of buyers because customers are less
price-sensitive
Strong brand loyalty reduces customers' willingness to switch, decreasing their price
sensitivity and bargaining power. While differentiation can create barriers to entry, it
does not increase the threat of new entrants; it decreases it. Rivalry may increase due to
imitation, but the primary effect on buyers is more direct. Substitutes remain a threat
unless the differentiation is truly unique.
3. A company's balance sheet shows total assets of $10 million, total liabilities of $6
million, and shareholders' equity of $4 million. If the company issues $1 million in
new common stock and uses the proceeds to repay a $1 million bank loan, what is the
immediate effect on the debt-to-equity ratio?
Answer: Decreases from 1.5 to 1.0
Initially, debt = $6 million, equity = $4 million, ratio = 6/4 = 1.5. After issuing stock,
equity increases to $5 million; repaying loan reduces debt to $5 million. New ratio = 5/5
= 1.0. Thus the ratio decreases from 1.5 to 1.0.
Page 2
,4. Which of the following scenarios best illustrates the concept of 'moral hazard' in
the context of corporate governance?
Answer: A manager takes excessive risks because his compensation is tied to
short-term profits and he will not bear the downside losses
Moral hazard occurs when one party takes on more risk because they do not bear the
full consequences of that risk. Option A describes a manager who benefits from
high-risk strategies but is insulated from losses, a classic moral hazard. Option B is a
conflict of interest, not necessarily moral hazard. Option C is a market reaction. Option
D is theft.
5. A firm is considering two mutually exclusive projects. Project A has an initial
investment of $100,000 and is expected to generate cash flows of $30,000 per year for
5 years. Project B requires an initial investment of $150,000 and will generate
$50,000 per year for 4 years. The cost of capital is 10%. Using the net present value
(NPV) method, which project should be chosen?
Answer: Project B because it has a higher NPV
NPV of A = -100,000 + 30,000 * PVIFA(10%,5) = -100,000 + 30,000 * 3.7908 = -100,000
+ 113,724 = $13,724. NPV of B = -150,000 + 50,000 * PVIFA(10%,4) = -150,000 + 50,000
* 3.1699 = -150,000 + 158,495 = $8,495. Project A has a higher NPV ($13,724 > $8,495),
so A should be chosen. Option A is correct.
6. Which of the following is a key difference between a corporation and a limited
liability company (LLC)?
Answer: A corporation is subject to double taxation on profits, while an LLC can
avoid double taxation by being taxed as a partnership
Corporations are taxed at the corporate level and again when dividends are distributed
to shareholders (double taxation). LLCs can elect to be taxed as a partnership, where
income passes through to owners and is taxed only once. Option A is false because both
offer limited liability. Option B is false; S-corporations have a 100-shareholder limit,
but regular corporations do not. Option D is true but not a key difference, as LLCs can
also issue membership interests.
Page 3
, 7. In the context of international trade, which of the following is an example of a
non-tariff barrier?
Answer: A quota limiting the number of foreign cars that can be imported
annually
A quota is a quantitative restriction on imports, which is a non-tariff barrier. Option A
is a tariff. Option C is a subsidy, which can distort trade but is not a barrier to imports.
Option D is an export tax, which affects exports, not imports.
8. Which of the following best describes the 'agency problem' in corporate finance?
Answer: Conflicts of interest between managers and shareholders
The agency problem refers to the conflict of interest between principals (shareholders)
and agents (managers) when managers act in their own self-interest rather than
maximizing shareholder wealth. Option A is a different conflict
(bondholder-shareholder). Options C and D are not standard definitions.
9. A company has a current ratio of 2.0 and a quick ratio of 1.0. If the company uses
cash to purchase inventory, what is the effect on these ratios?
Answer: Current ratio remains the same, quick ratio decreases
Current ratio = current assets / current liabilities; quick ratio = (current assets -
inventory) / current liabilities. Using cash to buy inventory reduces cash (current asset)
and increases inventory (current asset), leaving current assets unchanged, so current
ratio stays the same. However, quick assets (cash) decrease, so quick ratio decreases.
10. Which of the following is a characteristic of a perfectly competitive market?
Answer: Firms are price takers
In perfect competition, many small firms sell identical products, and no single firm can
influence the market price; they are price takers. Options A, B, and D describe
monopolistic competition, oligopoly, and monopoly, respectively.
Page 4
