WGU C214 OA Financial Management Exam 2024 |
Accurate Realistic Exam Questions and Answers with
Detailed Rationales
Q1. Receiving $100 today is more valuable than $100 in one year due to what
principle?
A) Perpetuity
B) Payback Period
C) Time Value of Money
D) IRR
Rationale: Money today can earn returns over time, making it more valuable than
the same amount in the future.
Q2. A stock paying fixed dividends indefinitely is called a:
A) Annuity
B) Ordinary Annuity
C) Perpetuity
D) Zero-Coupon Bond
Rationale: A perpetuity provides consistent cash flows forever; its PV is calculated
simply as payment ÷ discount rate.
Q3. An investor may prefer a lower guaranteed return over a riskier higher return
due to:
A) Capital Budgeting
B) IRR
C) Risk-Return Tradeoff
D) NPV
Rationale: Higher returns are associated with higher risk; risk-averse investors
may prefer safer options.
,Q4. The difference between present value of inflows and initial investment is
called:
A) Payback Period
B) Net Present Value (NPV)
C) IRR
D) Accounting Rate of Return
Rationale: NPV shows the value added by a project, accounting for the time value
of money.
Q5. When choosing between mutually exclusive projects, which should be
selected?
A) Highest IRR
B) Highest NPV
C) Shortest payback
D) Lowest risk
Rationale: NPV maximizes firm value; IRR can be misleading with different cash
flow patterns.
Q6. Which metric measures the rate at which NPV = 0?
A) Payback Period
B) NPV
C) Internal Rate of Return (IRR)
D) Profitability Index
Rationale: IRR is the discount rate where the present value of inflows equals the
initial investment.
Q7. What does the Capital Asset Pricing Model (CAPM) measure?
A) Total cash flows
B) Accounting profits
, C) Expected return based on risk (beta)
D) Dividend yield
Rationale: CAPM estimates expected return using risk-free rate, beta, and market
return.
Q8. Diversification helps investors by:
A) Eliminating all risk
B) Reducing systematic risk
C) Reducing unsystematic risk
D) Increasing expected returns only
Rationale: Diversification spreads firm-specific risk (unsystematic) but cannot
eliminate market (systematic) risk.
Q9. Weighted Average Cost of Capital (WACC) is used for:
A) Measuring profits
B) Discounting cash flows for investment projects
C) Dividend calculation
D) Market price prediction
Rationale: WACC represents the firm’s average cost of financing and is used as
the discount rate in NPV calculations.
Q10. A high debt ratio increases:
A) Equity returns only
B) Financial risk
C) Cash flow stability
D) NPV
Rationale: Higher debt increases the firm’s financial risk due to fixed interest
obligations.
Q11. Which statement about NPV is TRUE?
A) A negative NPV is acceptable
Accurate Realistic Exam Questions and Answers with
Detailed Rationales
Q1. Receiving $100 today is more valuable than $100 in one year due to what
principle?
A) Perpetuity
B) Payback Period
C) Time Value of Money
D) IRR
Rationale: Money today can earn returns over time, making it more valuable than
the same amount in the future.
Q2. A stock paying fixed dividends indefinitely is called a:
A) Annuity
B) Ordinary Annuity
C) Perpetuity
D) Zero-Coupon Bond
Rationale: A perpetuity provides consistent cash flows forever; its PV is calculated
simply as payment ÷ discount rate.
Q3. An investor may prefer a lower guaranteed return over a riskier higher return
due to:
A) Capital Budgeting
B) IRR
C) Risk-Return Tradeoff
D) NPV
Rationale: Higher returns are associated with higher risk; risk-averse investors
may prefer safer options.
,Q4. The difference between present value of inflows and initial investment is
called:
A) Payback Period
B) Net Present Value (NPV)
C) IRR
D) Accounting Rate of Return
Rationale: NPV shows the value added by a project, accounting for the time value
of money.
Q5. When choosing between mutually exclusive projects, which should be
selected?
A) Highest IRR
B) Highest NPV
C) Shortest payback
D) Lowest risk
Rationale: NPV maximizes firm value; IRR can be misleading with different cash
flow patterns.
Q6. Which metric measures the rate at which NPV = 0?
A) Payback Period
B) NPV
C) Internal Rate of Return (IRR)
D) Profitability Index
Rationale: IRR is the discount rate where the present value of inflows equals the
initial investment.
Q7. What does the Capital Asset Pricing Model (CAPM) measure?
A) Total cash flows
B) Accounting profits
, C) Expected return based on risk (beta)
D) Dividend yield
Rationale: CAPM estimates expected return using risk-free rate, beta, and market
return.
Q8. Diversification helps investors by:
A) Eliminating all risk
B) Reducing systematic risk
C) Reducing unsystematic risk
D) Increasing expected returns only
Rationale: Diversification spreads firm-specific risk (unsystematic) but cannot
eliminate market (systematic) risk.
Q9. Weighted Average Cost of Capital (WACC) is used for:
A) Measuring profits
B) Discounting cash flows for investment projects
C) Dividend calculation
D) Market price prediction
Rationale: WACC represents the firm’s average cost of financing and is used as
the discount rate in NPV calculations.
Q10. A high debt ratio increases:
A) Equity returns only
B) Financial risk
C) Cash flow stability
D) NPV
Rationale: Higher debt increases the firm’s financial risk due to fixed interest
obligations.
Q11. Which statement about NPV is TRUE?
A) A negative NPV is acceptable
