C214 WGU STUDY GUIDE QUESTIONS
WITH VERIFIED SOLUTIONS 2025-
2026
1. Financial Securities (3 types) CORRECT ANSWER 1. Gov Securities(treasury bonds)-
gov invest in natl defense to freeways. Loans provide by the public to gov. When tax revs fall short to
cover expenditures, gov issues bonds from 60 days-30yrs.
2. Corporate Bonds- Google might be looking to invest another $50 billion in low-
orbiting satellites; however, because of its size, the company cannot walk into a local bank hoping for
a $50-
billion loan. Instead, Google will likely issue bonds with a face value of $1,000 that make one or two a
nnual coupon payments a year and might be paid back over a 20-year period.
Corporate finance is NOT devoted to understanding various types of financial instruments; investment
s are. *Corporate finance focuses on the decision making by the management of the firm.
3. Stocks-
share of ownership in a co. If Google did not want to borrow money from bondholders to finance th
e $50-billion low-orbiting satellite project, Google could sell shares of ownership in the company.
Syndicate CORRECT ANSWER
is a group that is temporarily formed to handle a bond or stock issue. Syndicates are generally made
up of large investment banks or other types of institutional investors. These large investment banks th
at make up a syndicate might also be the underwriters of the security issue. An underwriter has the r
esponsibility of determining the value of the security and then, in some cases, the underwriter will pu
rchase all of the securities from the issuer and then sell them to other investors.
Two ways a firm issuing a bond can place the bonds with a syndicate:
1. Competitive Sale-
Those wishing to underwrite the bond issue will submit bids (on bond's prices and interest rate) to t
he issuing firm. Firm will then select the underwriter that offered the highest price and lowest interes
t rate. Underwriter will sell bonds to various investors at (hopefully) a slightly higher price than purch
ase price.
2. Negotiated Sale-
like the competitive sale, a negotiated sale is the process of underwriters submitting proposals includ
,ing bids. However, this latter type of sale involves a more thorough interview process with the under
writers. Further, the issuing firm will carefully select the management team that will place these bond
s.
Primary Markets (Stocks & Bonds) CORRECT ANSWER
The primary market for stock issuance works in a similar way to the bond primary market. However, s
ome terminology is different. A firm that is going public (or selling shares of ownership for the first ti
me) is going to perform an initial public offering (IPO). These IPOs are sometimes called new equity of
ferings. However, much of the underwriting occurs in a similar manner, which we have discussed abov
e.
Secondary Markets (2 types) CORRECT ANSWER 1. Auction Market-
an auction financial market has a physical location and prices are determined by the highest price an
investor is willing to pay. The New York Stock Exchange (NYSE), the world's largest secondary financial
market. NYSE has a single dealer that provides liquidity.
*Some high frequency traders provide liquidity to the rest of the market.
*If providing liquidity becomes more risky, then dealers will increase the spread.
*If the price of a particular stock begins to heavily fluctuate, then the specialist will INCREASE the spr
ead.
2. Dealer market-
does not require a physical location. Securities are bought and sold through a network of dealers tha
t trade for themselves. a dealer might hold inventory for particular stock and willing to sell to those t
hat demand the stock and buy from those that will supply the stock. NASDAQ, (second-
largest secondary market worldly), is example of a dealer market. Most stocks that are listed on NASD
AQ have multiple dealers for each. The idea behind having multiple dealers providing liquidity to inves
tors is that the dealers must compete with one another, thus lowering the cost of transacting.
Spread CORRECT ANSWER The difference between the bid price and the ask price.
If the price of a particular stock begins to heavily fluctuate, then the specialist will INCREASE the spre
ad.
,Stock Orders (2 types) CORRECT ANSWER Market orders-
are time sensitive and would execute at the current ask price.
Limit orders-
-Buy Limit Order can only be executed at the limit price or lower
-Sell Limit Order can only be executed at the limit price or higher.
Market Prices CORRECT ANSWER -
Convey info to consumers. Perhaps the newly priced milk is of lower quality or the grocer has excess i
nventory.
-
Affect incentives. For instance, a sophisticated consumer might not be in the market for a brand new
car at its current price. However, the dealership could incentivize the consumer by dramatically loweri
ng the price.
-
Affect the distribution of income. Nearly all students would agree that the price of garbage collection
is lower than the price of health care.
Calculating Security Returns CORRECT ANSWER two types:
1. Dollar returns-
are calculated by taking the difference between the previous price and current price, plus any additio
nal cash flow that came from the security. (EX: bonds pay a coupon (or interest) payment 1 or 2 times
yearly; stocks pay a dividend. Mathematically, dollar returns are calculated in the following way.
Pt - Pt-1 + CFt
In this equation, Pt is the sold price, Pt-
1 is the bought price, and CFt is the cash flow (coupons for bonds; dividends for stocks).
, 2. Percentage returns-
Percentage returns are calculated by simply dividing the dollar returns by the price of the security at
time t-1, or the previous time period.
Pt-Pt-1/Pt-1 + CFt/Pt-1
Maximizing Shareholder Value CORRECT ANSWER There are two issues:
1. Agency costs-
are real costs and the way that most firms mitigate some of these costs is by aligning managers' inter
ests with shareholders' interests; they are costs by management not acting in the best interests of the
shareholders; asymmetrical costs. Most commonly, management might be compensated with shares
of ownership in the company or take on projects just because they want to.
2. Focusing solely on profits-
(unethical maximization), in some cases, (Enron 2001), the pursuit of profit has led to unethical beha
vior. However, profitable businesses are employing other workers and are providing their employees t
he means to consume goods and services from other businesses in the economy.
Finance v Accounting CORRECT ANSWER Accounting- is backward-looking
and risk free. Finance- is forward-looking and involves massive uncertainty.
Accrual Accounting & Matching Principle CORRECT ANSWER
(regardless of when a company incurs cost or revenue, it is reported only when the associated cost or
revenue is recognized. Neither COGS not revenue represents actual cash.)
allows managers to decide what is "recognized" on the financial statements. Accrual accounting: Reve
nues are recognized when the earnings process is complete; expenses are "matched" to recognized re
venues.
*The accrual system also employs the matching principle.
The matching principle requires that revenue recognized must be matched with the expenses incurre
d to generate the revenue.
WITH VERIFIED SOLUTIONS 2025-
2026
1. Financial Securities (3 types) CORRECT ANSWER 1. Gov Securities(treasury bonds)-
gov invest in natl defense to freeways. Loans provide by the public to gov. When tax revs fall short to
cover expenditures, gov issues bonds from 60 days-30yrs.
2. Corporate Bonds- Google might be looking to invest another $50 billion in low-
orbiting satellites; however, because of its size, the company cannot walk into a local bank hoping for
a $50-
billion loan. Instead, Google will likely issue bonds with a face value of $1,000 that make one or two a
nnual coupon payments a year and might be paid back over a 20-year period.
Corporate finance is NOT devoted to understanding various types of financial instruments; investment
s are. *Corporate finance focuses on the decision making by the management of the firm.
3. Stocks-
share of ownership in a co. If Google did not want to borrow money from bondholders to finance th
e $50-billion low-orbiting satellite project, Google could sell shares of ownership in the company.
Syndicate CORRECT ANSWER
is a group that is temporarily formed to handle a bond or stock issue. Syndicates are generally made
up of large investment banks or other types of institutional investors. These large investment banks th
at make up a syndicate might also be the underwriters of the security issue. An underwriter has the r
esponsibility of determining the value of the security and then, in some cases, the underwriter will pu
rchase all of the securities from the issuer and then sell them to other investors.
Two ways a firm issuing a bond can place the bonds with a syndicate:
1. Competitive Sale-
Those wishing to underwrite the bond issue will submit bids (on bond's prices and interest rate) to t
he issuing firm. Firm will then select the underwriter that offered the highest price and lowest interes
t rate. Underwriter will sell bonds to various investors at (hopefully) a slightly higher price than purch
ase price.
2. Negotiated Sale-
like the competitive sale, a negotiated sale is the process of underwriters submitting proposals includ
,ing bids. However, this latter type of sale involves a more thorough interview process with the under
writers. Further, the issuing firm will carefully select the management team that will place these bond
s.
Primary Markets (Stocks & Bonds) CORRECT ANSWER
The primary market for stock issuance works in a similar way to the bond primary market. However, s
ome terminology is different. A firm that is going public (or selling shares of ownership for the first ti
me) is going to perform an initial public offering (IPO). These IPOs are sometimes called new equity of
ferings. However, much of the underwriting occurs in a similar manner, which we have discussed abov
e.
Secondary Markets (2 types) CORRECT ANSWER 1. Auction Market-
an auction financial market has a physical location and prices are determined by the highest price an
investor is willing to pay. The New York Stock Exchange (NYSE), the world's largest secondary financial
market. NYSE has a single dealer that provides liquidity.
*Some high frequency traders provide liquidity to the rest of the market.
*If providing liquidity becomes more risky, then dealers will increase the spread.
*If the price of a particular stock begins to heavily fluctuate, then the specialist will INCREASE the spr
ead.
2. Dealer market-
does not require a physical location. Securities are bought and sold through a network of dealers tha
t trade for themselves. a dealer might hold inventory for particular stock and willing to sell to those t
hat demand the stock and buy from those that will supply the stock. NASDAQ, (second-
largest secondary market worldly), is example of a dealer market. Most stocks that are listed on NASD
AQ have multiple dealers for each. The idea behind having multiple dealers providing liquidity to inves
tors is that the dealers must compete with one another, thus lowering the cost of transacting.
Spread CORRECT ANSWER The difference between the bid price and the ask price.
If the price of a particular stock begins to heavily fluctuate, then the specialist will INCREASE the spre
ad.
,Stock Orders (2 types) CORRECT ANSWER Market orders-
are time sensitive and would execute at the current ask price.
Limit orders-
-Buy Limit Order can only be executed at the limit price or lower
-Sell Limit Order can only be executed at the limit price or higher.
Market Prices CORRECT ANSWER -
Convey info to consumers. Perhaps the newly priced milk is of lower quality or the grocer has excess i
nventory.
-
Affect incentives. For instance, a sophisticated consumer might not be in the market for a brand new
car at its current price. However, the dealership could incentivize the consumer by dramatically loweri
ng the price.
-
Affect the distribution of income. Nearly all students would agree that the price of garbage collection
is lower than the price of health care.
Calculating Security Returns CORRECT ANSWER two types:
1. Dollar returns-
are calculated by taking the difference between the previous price and current price, plus any additio
nal cash flow that came from the security. (EX: bonds pay a coupon (or interest) payment 1 or 2 times
yearly; stocks pay a dividend. Mathematically, dollar returns are calculated in the following way.
Pt - Pt-1 + CFt
In this equation, Pt is the sold price, Pt-
1 is the bought price, and CFt is the cash flow (coupons for bonds; dividends for stocks).
, 2. Percentage returns-
Percentage returns are calculated by simply dividing the dollar returns by the price of the security at
time t-1, or the previous time period.
Pt-Pt-1/Pt-1 + CFt/Pt-1
Maximizing Shareholder Value CORRECT ANSWER There are two issues:
1. Agency costs-
are real costs and the way that most firms mitigate some of these costs is by aligning managers' inter
ests with shareholders' interests; they are costs by management not acting in the best interests of the
shareholders; asymmetrical costs. Most commonly, management might be compensated with shares
of ownership in the company or take on projects just because they want to.
2. Focusing solely on profits-
(unethical maximization), in some cases, (Enron 2001), the pursuit of profit has led to unethical beha
vior. However, profitable businesses are employing other workers and are providing their employees t
he means to consume goods and services from other businesses in the economy.
Finance v Accounting CORRECT ANSWER Accounting- is backward-looking
and risk free. Finance- is forward-looking and involves massive uncertainty.
Accrual Accounting & Matching Principle CORRECT ANSWER
(regardless of when a company incurs cost or revenue, it is reported only when the associated cost or
revenue is recognized. Neither COGS not revenue represents actual cash.)
allows managers to decide what is "recognized" on the financial statements. Accrual accounting: Reve
nues are recognized when the earnings process is complete; expenses are "matched" to recognized re
venues.
*The accrual system also employs the matching principle.
The matching principle requires that revenue recognized must be matched with the expenses incurre
d to generate the revenue.
