WGU C214 Financial Management Exam
Prep 2025 – Verified Questions and 100%
Correct Solutions
Question 1
What is the primary goal of a private firm to maximize shareholder value?
a) Increase market share regardless of cost
b) Maximize short-term profits
c) Make decisions that enhance long-term stock price
d) Minimize operational expenses
Correct Answer: c) Make decisions that enhance long-term stock price
Explanation: The primary goal of a private firm is to maximize shareholder value, which is
achieved by making decisions that enhance the long-term stock price. This approach balances
profitability, growth, and risk to ensure sustainable value creation for shareholders, aligning with
corporate finance principles. Short-term profit maximization (b) may harm long-term growth,
while increasing market share (a) or minimizing expenses (d) are means to an end, not the
primary goal.
Question 2
Which financial statement is prepared at a specific point in time?
a) Income Statement
b) Statement of Cash Flows
c) Balance Sheet
d) Statement of Retained Earnings
Correct Answer: c) Balance Sheet
Explanation: The Balance Sheet provides a snapshot of a company’s financial position at a
specific point in time, detailing assets, liabilities, and equity. In contrast, the Income Statement,
Statement of Cash Flows, and Statement of Retained Earnings cover a period of time, reflecting
activities over a duration.
Question 3
,How does an increase in accounts receivable impact Cash Flow from Operating Activities
(CFO)?
a) Increases CFO
b) Decreases CFO
c) No impact on CFO
d) Converts CFO to negative
Correct Answer: b) Decreases CFO
Explanation: An increase in accounts receivable indicates that a company has made sales on
credit, which reduces cash inflow because cash has not yet been collected. In the Statement of
Cash Flows, this increase is subtracted from net income when calculating CFO, thus decreasing
it.
Question 4
What does the Foreign Corrupt Practices Act (FCPA) prohibit U.S. companies from doing?
a) Engaging in international trade
b) Paying bribes to foreign officials for business deals
c) Investing in foreign markets
d) Outsourcing manufacturing to foreign countries
Correct Answer: b) Paying bribes to foreign officials for business deals
Explanation: The FCPA prohibits U.S. companies and individuals from paying bribes to foreign
officials to secure or retain business, ensuring ethical conduct in international transactions. It
does not restrict trade, investment, or outsourcing, which are legitimate business activities.
Question 5
What are the two basic types of financial instruments?
a) Stocks and bonds
b) Assets and liabilities
c) Equity and derivatives
d) Cash and accounts receivable
Correct Answer: a) Stocks and bonds
Explanation: Financial instruments are primarily categorized as stocks (equity instruments
representing ownership) and bonds (debt instruments representing loans). Assets and liabilities
are broader accounting terms, while derivatives are a subset of financial instruments. Cash and
accounts receivable are not classified as financial instruments in this context.
, Question 6
A company has a market return of 14%, a risk-free rate of 2%, and a beta of 0.75. What is the
stock’s required return using the CAPM formula?
a) 12%
b) 14%
c) 11%
d) 9%
Correct Answer: c) 11%
Explanation: The Capital Asset Pricing Model (CAPM) formula is:
[ ER_i = R_f + \beta (ER_m - R_f) ]
Where ( ER_i ) = expected return, ( R_f ) = risk-free rate, ( \beta ) = beta, ( ER_m ) = market
return.
Plugging in: ( ER_i = 2% + 0.75 (14% - 2%) = 2% + 0.75 \times 12% = 2% + 9% = 11% ).
Thus, the required return is 11%.
Question 7
Which of the following is a characteristic of preferred stock?
a) Voting rights
b) Cumulative dividends
c) Unlimited earnings potential
d) Lower payoff claim in bankruptcy
Correct Answer: b) Cumulative dividends
Explanation: Preferred stock typically has cumulative dividends, meaning unpaid dividends
(dividends in arrears) must be paid before common stock dividends. Preferred stock lacks voting
rights (a), has fixed dividends rather than unlimited earnings (c), and has a higher payoff claim in
bankruptcy than common stock (d).
Question 8
What is the formula for Cash Flow from Financing Activities (CFF)?
a) Net Income + Depreciation – Increase in NWC
b) Increase in Long-Term Debt + Increase in Stock – Dividends Paid
c) Change in Long-Term Assets
d) Net Income – Increase in Accounts Receivable
Correct Answer: b) Increase in Long-Term Debt + Increase in Stock – Dividends Paid
Explanation: CFF reflects cash flows related to funding the company, including issuing debt or
Prep 2025 – Verified Questions and 100%
Correct Solutions
Question 1
What is the primary goal of a private firm to maximize shareholder value?
a) Increase market share regardless of cost
b) Maximize short-term profits
c) Make decisions that enhance long-term stock price
d) Minimize operational expenses
Correct Answer: c) Make decisions that enhance long-term stock price
Explanation: The primary goal of a private firm is to maximize shareholder value, which is
achieved by making decisions that enhance the long-term stock price. This approach balances
profitability, growth, and risk to ensure sustainable value creation for shareholders, aligning with
corporate finance principles. Short-term profit maximization (b) may harm long-term growth,
while increasing market share (a) or minimizing expenses (d) are means to an end, not the
primary goal.
Question 2
Which financial statement is prepared at a specific point in time?
a) Income Statement
b) Statement of Cash Flows
c) Balance Sheet
d) Statement of Retained Earnings
Correct Answer: c) Balance Sheet
Explanation: The Balance Sheet provides a snapshot of a company’s financial position at a
specific point in time, detailing assets, liabilities, and equity. In contrast, the Income Statement,
Statement of Cash Flows, and Statement of Retained Earnings cover a period of time, reflecting
activities over a duration.
Question 3
,How does an increase in accounts receivable impact Cash Flow from Operating Activities
(CFO)?
a) Increases CFO
b) Decreases CFO
c) No impact on CFO
d) Converts CFO to negative
Correct Answer: b) Decreases CFO
Explanation: An increase in accounts receivable indicates that a company has made sales on
credit, which reduces cash inflow because cash has not yet been collected. In the Statement of
Cash Flows, this increase is subtracted from net income when calculating CFO, thus decreasing
it.
Question 4
What does the Foreign Corrupt Practices Act (FCPA) prohibit U.S. companies from doing?
a) Engaging in international trade
b) Paying bribes to foreign officials for business deals
c) Investing in foreign markets
d) Outsourcing manufacturing to foreign countries
Correct Answer: b) Paying bribes to foreign officials for business deals
Explanation: The FCPA prohibits U.S. companies and individuals from paying bribes to foreign
officials to secure or retain business, ensuring ethical conduct in international transactions. It
does not restrict trade, investment, or outsourcing, which are legitimate business activities.
Question 5
What are the two basic types of financial instruments?
a) Stocks and bonds
b) Assets and liabilities
c) Equity and derivatives
d) Cash and accounts receivable
Correct Answer: a) Stocks and bonds
Explanation: Financial instruments are primarily categorized as stocks (equity instruments
representing ownership) and bonds (debt instruments representing loans). Assets and liabilities
are broader accounting terms, while derivatives are a subset of financial instruments. Cash and
accounts receivable are not classified as financial instruments in this context.
, Question 6
A company has a market return of 14%, a risk-free rate of 2%, and a beta of 0.75. What is the
stock’s required return using the CAPM formula?
a) 12%
b) 14%
c) 11%
d) 9%
Correct Answer: c) 11%
Explanation: The Capital Asset Pricing Model (CAPM) formula is:
[ ER_i = R_f + \beta (ER_m - R_f) ]
Where ( ER_i ) = expected return, ( R_f ) = risk-free rate, ( \beta ) = beta, ( ER_m ) = market
return.
Plugging in: ( ER_i = 2% + 0.75 (14% - 2%) = 2% + 0.75 \times 12% = 2% + 9% = 11% ).
Thus, the required return is 11%.
Question 7
Which of the following is a characteristic of preferred stock?
a) Voting rights
b) Cumulative dividends
c) Unlimited earnings potential
d) Lower payoff claim in bankruptcy
Correct Answer: b) Cumulative dividends
Explanation: Preferred stock typically has cumulative dividends, meaning unpaid dividends
(dividends in arrears) must be paid before common stock dividends. Preferred stock lacks voting
rights (a), has fixed dividends rather than unlimited earnings (c), and has a higher payoff claim in
bankruptcy than common stock (d).
Question 8
What is the formula for Cash Flow from Financing Activities (CFF)?
a) Net Income + Depreciation – Increase in NWC
b) Increase in Long-Term Debt + Increase in Stock – Dividends Paid
c) Change in Long-Term Assets
d) Net Income – Increase in Accounts Receivable
Correct Answer: b) Increase in Long-Term Debt + Increase in Stock – Dividends Paid
Explanation: CFF reflects cash flows related to funding the company, including issuing debt or
