WGU C214 – FINANCIAL MANAGEMENT OBJECTIVE ASSESMENT QUESTIONS AND ANSWERS
2026/27 UPDATES
Which of the following best describes the primary role of a firm's capital structure decisions?
A) Determining the mix of current and long-term assets to hold
B) Deciding the appropriate mix of debt and equity financing to fund operations
C) Establishing the optimal level of cash reserves for daily operations
D) Selecting the right portfolio of investment projects to pursue
Correct Answer: Deciding the appropriate mix of debt and equity financing to fund operations
Rationale: Capital structure refers to the proportional level of debt and equity financing necessary to
maintain the firm's operations. The goal is to find the optimal mix that maximizes firm value . Managing
working capital involves current assets and liabilities, while capital budgeting relates to selecting
investment projects.
What is a "hybrid" security in corporate finance?
A) A bond that can be converted into common stock
B) A security that combines features of both debt and equity instruments
C) A combination of two different types of common stock
D) A security issued in both domestic and international markets
Correct Answer: A security that combines features of both debt and equity instruments
Rationale: Preferred stock is often referred to as a "hybrid" security because it has features like bonds
(fixed dividend payments) and common stock (ownership stake) . Convertible bonds are also hybrid
securities as they can be exchanged for equity.
Why does a firm's WACC (Weighted Average Cost of Capital) change when the mix of bonds and stock is
altered?
A) WACC is fixed by regulatory agencies and does not change
,B) The cost of debt is always lower than equity, so WACC always decreases
C) Changing the mix affects the proportion of cheaper debt vs. more expensive equity, altering the
overall average cost
D) WACC changes only when interest rates in the economy change
Correct Answer: Changing the mix affects the proportion of cheaper debt vs. more expensive equity,
altering the overall average cost
Rationale: WACC is the average rate a firm pays for all its capital. Since debt is typically cheaper than
equity (due to tax deductibility and lower risk), increasing the proportion of debt can lower WACC, but
beyond a certain point, it increases financial risk and raises the cost of both . Therefore, WACC may
increase or decrease depending on the mix.
According to the Modigliani-Miller (M&M) theorem, what is the initial proposition regarding the effect
of debt on WACC?
A) Increasing debt always lowers WACC due to the tax shield
B) The debt-equity ratio does not affect WACC in a perfect market without taxes
C) WACC is minimized when the firm uses 100% debt financing
D) WACC is directly proportional to the amount of debt used
Correct Answer: The debt-equity ratio does not affect WACC in a perfect market without taxes
Rationale: The M&M theorem, in its initial proposition, states that in a perfect market (no taxes, no
bankruptcy costs), the value of a firm is unaffected by its capital structure. Therefore, the debt-equity
ratio does not affect WACC . However, recent evidence shows that in the real world, with taxes and
bankruptcy costs, the debt-equity ratio does have an effect .
Which of the following is the correct formula for calculating the change in Retained Earnings?
A) Ending Retained Earnings – Beginning Retained Earnings
B) Net Income + Dividends
C) Net Income – Dividends
D) Beginning Retained Earnings + Net Income
,Correct Answer: Net Income – Dividends
Rationale: The change in Retained Earnings from one period to the next is calculated by taking Net
Income for the period and subtracting any Dividends paid to shareholders . This represents the portion
of earnings retained for reinvestment in the business.
A firm reported retained earnings of $300 at 12/31/20x2. For 12/31/20x3, the firm reports retained
earnings of $400 and pays dividends of $25. What was net income in 20x3?
A) $300
B) $400
C) $125
D) $100
Correct Answer: $125
Rationale: The change in retained earnings is Net Income minus Dividends. The change from $300 to
$400 is an increase of $100. Therefore, Net Income – $25 Dividends = $100 change. Solving for Net
Income gives $100 + $25 = $125 .
What does a basic equation for the Balance Sheet state?
A) Equity = Assets - Liabilities
B) Liabilities = Equity + Assets
C) Assets = Liabilities - Equity
D) Assets = Equity - Liabilities
Correct Answer: Equity = Assets - Liabilities
Rationale: The fundamental accounting equation for the Balance Sheet is Assets = Liabilities + Equity.
Rearranging this, we get Equity = Assets – Liabilities . This is the foundation for the balance sheet's
structure.
, Why is the Balance Sheet known as a "permanent" statement?
A) Because the statement is sent to the SEC every year
B) Because the other financial statements are reset at the end of the fiscal year, while the balance sheet
persists
C) Because it is printed out and archived for legal purposes
D) Because it persists in the minds of shareholders
Correct Answer: Because the other financial statements are reset at the end of the fiscal year, while the
balance sheet persists
Rationale: The Balance Sheet is considered a permanent statement because it is a "snapshot" of a
company's financial position at a single point in time. The accounts are not closed or reset at the end of
the year; they carry over from one period to the next . Income statement accounts are temporary and
reset to zero.
Which components are part of a firm's Total Assets?
A) Cash, Accounts Receivable, Short Term Debt
B) Cash, Accounts Receivable, Inventory, Long Term Assets
C) Accounts Payable, Long Term Assets, Long Term Debt
D) Accounts Payable, Net Income, Equity
Correct Answer: Cash, Accounts Receivable, Inventory, Long Term Assets
Rationale: Total Assets include everything a company owns that has monetary value. This is divided into
Current Assets (like Cash, Accounts Receivable, Inventory) and Long-Term Assets (like Property, Plant,
and Equipment) . Short Term Debt, Accounts Payable, and Long Term Debt are on the liabilities side of
the balance sheet.
Which components are part of a firm's Total Liabilities?
A) Accounts Payable, Accounts Receivable, Short Term Debt
B) Long Term Debt, Common Stock, Retained Earnings
2026/27 UPDATES
Which of the following best describes the primary role of a firm's capital structure decisions?
A) Determining the mix of current and long-term assets to hold
B) Deciding the appropriate mix of debt and equity financing to fund operations
C) Establishing the optimal level of cash reserves for daily operations
D) Selecting the right portfolio of investment projects to pursue
Correct Answer: Deciding the appropriate mix of debt and equity financing to fund operations
Rationale: Capital structure refers to the proportional level of debt and equity financing necessary to
maintain the firm's operations. The goal is to find the optimal mix that maximizes firm value . Managing
working capital involves current assets and liabilities, while capital budgeting relates to selecting
investment projects.
What is a "hybrid" security in corporate finance?
A) A bond that can be converted into common stock
B) A security that combines features of both debt and equity instruments
C) A combination of two different types of common stock
D) A security issued in both domestic and international markets
Correct Answer: A security that combines features of both debt and equity instruments
Rationale: Preferred stock is often referred to as a "hybrid" security because it has features like bonds
(fixed dividend payments) and common stock (ownership stake) . Convertible bonds are also hybrid
securities as they can be exchanged for equity.
Why does a firm's WACC (Weighted Average Cost of Capital) change when the mix of bonds and stock is
altered?
A) WACC is fixed by regulatory agencies and does not change
,B) The cost of debt is always lower than equity, so WACC always decreases
C) Changing the mix affects the proportion of cheaper debt vs. more expensive equity, altering the
overall average cost
D) WACC changes only when interest rates in the economy change
Correct Answer: Changing the mix affects the proportion of cheaper debt vs. more expensive equity,
altering the overall average cost
Rationale: WACC is the average rate a firm pays for all its capital. Since debt is typically cheaper than
equity (due to tax deductibility and lower risk), increasing the proportion of debt can lower WACC, but
beyond a certain point, it increases financial risk and raises the cost of both . Therefore, WACC may
increase or decrease depending on the mix.
According to the Modigliani-Miller (M&M) theorem, what is the initial proposition regarding the effect
of debt on WACC?
A) Increasing debt always lowers WACC due to the tax shield
B) The debt-equity ratio does not affect WACC in a perfect market without taxes
C) WACC is minimized when the firm uses 100% debt financing
D) WACC is directly proportional to the amount of debt used
Correct Answer: The debt-equity ratio does not affect WACC in a perfect market without taxes
Rationale: The M&M theorem, in its initial proposition, states that in a perfect market (no taxes, no
bankruptcy costs), the value of a firm is unaffected by its capital structure. Therefore, the debt-equity
ratio does not affect WACC . However, recent evidence shows that in the real world, with taxes and
bankruptcy costs, the debt-equity ratio does have an effect .
Which of the following is the correct formula for calculating the change in Retained Earnings?
A) Ending Retained Earnings – Beginning Retained Earnings
B) Net Income + Dividends
C) Net Income – Dividends
D) Beginning Retained Earnings + Net Income
,Correct Answer: Net Income – Dividends
Rationale: The change in Retained Earnings from one period to the next is calculated by taking Net
Income for the period and subtracting any Dividends paid to shareholders . This represents the portion
of earnings retained for reinvestment in the business.
A firm reported retained earnings of $300 at 12/31/20x2. For 12/31/20x3, the firm reports retained
earnings of $400 and pays dividends of $25. What was net income in 20x3?
A) $300
B) $400
C) $125
D) $100
Correct Answer: $125
Rationale: The change in retained earnings is Net Income minus Dividends. The change from $300 to
$400 is an increase of $100. Therefore, Net Income – $25 Dividends = $100 change. Solving for Net
Income gives $100 + $25 = $125 .
What does a basic equation for the Balance Sheet state?
A) Equity = Assets - Liabilities
B) Liabilities = Equity + Assets
C) Assets = Liabilities - Equity
D) Assets = Equity - Liabilities
Correct Answer: Equity = Assets - Liabilities
Rationale: The fundamental accounting equation for the Balance Sheet is Assets = Liabilities + Equity.
Rearranging this, we get Equity = Assets – Liabilities . This is the foundation for the balance sheet's
structure.
, Why is the Balance Sheet known as a "permanent" statement?
A) Because the statement is sent to the SEC every year
B) Because the other financial statements are reset at the end of the fiscal year, while the balance sheet
persists
C) Because it is printed out and archived for legal purposes
D) Because it persists in the minds of shareholders
Correct Answer: Because the other financial statements are reset at the end of the fiscal year, while the
balance sheet persists
Rationale: The Balance Sheet is considered a permanent statement because it is a "snapshot" of a
company's financial position at a single point in time. The accounts are not closed or reset at the end of
the year; they carry over from one period to the next . Income statement accounts are temporary and
reset to zero.
Which components are part of a firm's Total Assets?
A) Cash, Accounts Receivable, Short Term Debt
B) Cash, Accounts Receivable, Inventory, Long Term Assets
C) Accounts Payable, Long Term Assets, Long Term Debt
D) Accounts Payable, Net Income, Equity
Correct Answer: Cash, Accounts Receivable, Inventory, Long Term Assets
Rationale: Total Assets include everything a company owns that has monetary value. This is divided into
Current Assets (like Cash, Accounts Receivable, Inventory) and Long-Term Assets (like Property, Plant,
and Equipment) . Short Term Debt, Accounts Payable, and Long Term Debt are on the liabilities side of
the balance sheet.
Which components are part of a firm's Total Liabilities?
A) Accounts Payable, Accounts Receivable, Short Term Debt
B) Long Term Debt, Common Stock, Retained Earnings
