WGU C214 OA FINANCIAL MANAGEMENT EXAM
QUESTIONS AND ANSWERS UPDATED (2025/2026)
(VERIFIED ANSWERS)
If accounts receivable increases, what is the impact on CFO? - ANSWER-CFO decreases
Are actual taxes paid the same as how on the GAAP income statement? - ANSWER-No.
Actual Taxes = IRS Rules
Income Statement = GAAP
Which decisions require using subjective estimates? - ANSWER-Economic life of a new asset.
If there is a 30% change of a recession, what is the probability of expansion? - ANSWER-70%
*The sum of probabilities must equal 100%
How much interest is paid on a 6% bond over 2 years and 3 months? - ANSWER-2 years and 3 months:
2 + (3/12) = 2 + (.25) = 2.25
6% x 1,000 = $60 per year
$60 x 2.25 = $135
How does a "prudent investor" select investments? - ANSWER-Seeks the highest return for
"appropriate" amount of risk.
What do points on the Efficient Frontier measure? - ANSWER-The maximum return for a given level of
risk; maximum Return-to-Risk ratio.
What is "Beta?" - ANSWER-Measure of a stock's risk relative to the market.
Why are accurate forecasts important? - ANSWER-Plan for resources for production; accurate
evaluation of capital projects.
Which ratio is used in valuing a private company? - ANSWER-PE ratio in the "Comparable Multiples"
method.
What are 3 costs associated with holding inventory? - ANSWER-1. Product
2. Storage
3. Opportunity
What risk is eliminated by a diversified portfolio? - ANSWER-Idiosyncratic Risk - Risk affecting a single
firm.
What are the impacts of outsourcing? - ANSWER-Fewer U.S. jobs and lower priced products.
What are the impacts of tariffs? - ANSWER-More U.S. jobs and higher product costs for consumers.
, What securities are exempt from FEDERAL income taxation? - ANSWER-Municipal bond interest is tax-
exempt. Treasury securities ARE taxable.
Why would a firm prefer to issue bonds rather than stock? - ANSWER-Debt has a lower required
return. Debt interest is tax deductible.
What is the impact on the APY as the number of interest payments per year increase? - ANSWER-APY
increases
What is the present value of future cash flows of a stock called? - ANSWER-Intrinsic Value - The "real"
value of the stock. PV of cash to investor.
What indicates if a stock is a "good investment?" - ANSWER-The price of the stock is less than the
"intrinsic value."
In the event of bankruptcy, what is the order of claims settlement? - ANSWER-1. Creditors
2. Subordinated Debt
3. Preferred Stock
4. Common Stock
What is a spontaneous account? - ANSWER-One that changes with the level of sales -- Current Assets
& Liabilities.
What is a discretionary account? - ANSWER-One that changes due to management decision -- Bonds
Outstanding.
If the financial ratios of 2 firms are compared, what is it called? - ANSWER-Cross-Sectional Analysis
If the debt ratio increases, what is the impact on Return on Equity (ROE)? - ANSWER-ROE increases
due to greater reliance on cheap debt financing.
What financial structure causes profitability to be more volatile? - ANSWER-Leverage. Higher leverage
ratios mean more volatile profits.
If debt is cheaper than equity, why not all debt? - ANSWER-Bankruptcy Risk -- Equity is the cushion
against bankruptcy.
If interest rates increase, what is the impact on the Weighted Average Cost of Capital (WACC)? -
ANSWER-Required returns on debt and equity increase. Thus WACC increases.
The Prospectus contains what information? - ANSWER-1. Audited Financial Statements
2. Description of Security
3. Operating Information
What is the purpose of the Securities and Exchange Commission (SEC)? - ANSWER-To ensure that U.S.
investors in the U.S. markets are well informed.
Why would a totally domestic firm worry about international trade? - ANSWER-Competition from
foreign firm imports to the U.S.
If a firm's ROE is greater than the Return on Assets (ROA), what does that mean? - ANSWER-The firm
uses debt financing wisely to increase profitability.
What is the term that refers to corporate managers acting in their own interests rather than the
stockholders? - ANSWER-Agency Cost
How can a firm avoid agency cost? - ANSWER-Tie compensation to the stock price.
QUESTIONS AND ANSWERS UPDATED (2025/2026)
(VERIFIED ANSWERS)
If accounts receivable increases, what is the impact on CFO? - ANSWER-CFO decreases
Are actual taxes paid the same as how on the GAAP income statement? - ANSWER-No.
Actual Taxes = IRS Rules
Income Statement = GAAP
Which decisions require using subjective estimates? - ANSWER-Economic life of a new asset.
If there is a 30% change of a recession, what is the probability of expansion? - ANSWER-70%
*The sum of probabilities must equal 100%
How much interest is paid on a 6% bond over 2 years and 3 months? - ANSWER-2 years and 3 months:
2 + (3/12) = 2 + (.25) = 2.25
6% x 1,000 = $60 per year
$60 x 2.25 = $135
How does a "prudent investor" select investments? - ANSWER-Seeks the highest return for
"appropriate" amount of risk.
What do points on the Efficient Frontier measure? - ANSWER-The maximum return for a given level of
risk; maximum Return-to-Risk ratio.
What is "Beta?" - ANSWER-Measure of a stock's risk relative to the market.
Why are accurate forecasts important? - ANSWER-Plan for resources for production; accurate
evaluation of capital projects.
Which ratio is used in valuing a private company? - ANSWER-PE ratio in the "Comparable Multiples"
method.
What are 3 costs associated with holding inventory? - ANSWER-1. Product
2. Storage
3. Opportunity
What risk is eliminated by a diversified portfolio? - ANSWER-Idiosyncratic Risk - Risk affecting a single
firm.
What are the impacts of outsourcing? - ANSWER-Fewer U.S. jobs and lower priced products.
What are the impacts of tariffs? - ANSWER-More U.S. jobs and higher product costs for consumers.
, What securities are exempt from FEDERAL income taxation? - ANSWER-Municipal bond interest is tax-
exempt. Treasury securities ARE taxable.
Why would a firm prefer to issue bonds rather than stock? - ANSWER-Debt has a lower required
return. Debt interest is tax deductible.
What is the impact on the APY as the number of interest payments per year increase? - ANSWER-APY
increases
What is the present value of future cash flows of a stock called? - ANSWER-Intrinsic Value - The "real"
value of the stock. PV of cash to investor.
What indicates if a stock is a "good investment?" - ANSWER-The price of the stock is less than the
"intrinsic value."
In the event of bankruptcy, what is the order of claims settlement? - ANSWER-1. Creditors
2. Subordinated Debt
3. Preferred Stock
4. Common Stock
What is a spontaneous account? - ANSWER-One that changes with the level of sales -- Current Assets
& Liabilities.
What is a discretionary account? - ANSWER-One that changes due to management decision -- Bonds
Outstanding.
If the financial ratios of 2 firms are compared, what is it called? - ANSWER-Cross-Sectional Analysis
If the debt ratio increases, what is the impact on Return on Equity (ROE)? - ANSWER-ROE increases
due to greater reliance on cheap debt financing.
What financial structure causes profitability to be more volatile? - ANSWER-Leverage. Higher leverage
ratios mean more volatile profits.
If debt is cheaper than equity, why not all debt? - ANSWER-Bankruptcy Risk -- Equity is the cushion
against bankruptcy.
If interest rates increase, what is the impact on the Weighted Average Cost of Capital (WACC)? -
ANSWER-Required returns on debt and equity increase. Thus WACC increases.
The Prospectus contains what information? - ANSWER-1. Audited Financial Statements
2. Description of Security
3. Operating Information
What is the purpose of the Securities and Exchange Commission (SEC)? - ANSWER-To ensure that U.S.
investors in the U.S. markets are well informed.
Why would a totally domestic firm worry about international trade? - ANSWER-Competition from
foreign firm imports to the U.S.
If a firm's ROE is greater than the Return on Assets (ROA), what does that mean? - ANSWER-The firm
uses debt financing wisely to increase profitability.
What is the term that refers to corporate managers acting in their own interests rather than the
stockholders? - ANSWER-Agency Cost
How can a firm avoid agency cost? - ANSWER-Tie compensation to the stock price.
