WGU D076 FINANCE EXAM WITH COMPLETE SOLUTIONS
100% VERIFIED 2025-2026!!
What is one way that a firm can improve its return on equity? - ANSWER>>Successfully
cutting production costs to boost net margin
BigDog and SmallDog are two companies that have an identical return on equity. One
difference between the two companies is that BigDog has 40% of assets financed by
debt while SmallDog has 100% of assets financed by equity. What can you conclude
about BigDog and SmallDog? - ANSWER>>SmallDog has a higher ROA than BigDog.
Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of
BigDog. Since both firms have the same ROE, SmallDog must have the higher ROA.
What actions, if taken simultaneously, would necessarily increase the ROE for a firm? -
ANSWER>>Less equity financing; more net margin
A company currently has a ratio of 1.5 but aspires to improve the ratio to 2 to better
meet the benchmark set by the industry. The goal was pursued by cutting costs in
production via an investment in efficient equipment and a higher profit margin was
realized by the company. If this were to continue, you are sure that in two years the firm
will achieve its goal. What is this an example of? - ANSWER>>Progress measurement
What ratio identifies the average length of time it takes, on average, for a firm to collect
accounts receivable? - ANSWER>>Average collection period
What does an average collection period of 70 indicate? - ANSWER>>On average a firm
takes 70 days to collect accounts receivable.
What does high inventory turnover relative to the industry and competitors reveal? -
ANSWER>>The firm does not have adequate inventory on hand and is making its
customers wait longer to take delivery of the goods purchased.
,What is the difference between ROA and ROE? - ANSWER>>ROE considers the capital
structure of a firm, whereas ROA does not.
Why are ratios useful for analyzing and comparing company performance between firms
of different sizes? - ANSWER>>They provide standardization.
What does a net margin of 7% mean? - ANSWER>>For every dollar of revenue, 7 cents
remain for the equity holders after all other costs are covered.
What is the term for the stock of a firm with market-to-book ratio of less than 1? -
ANSWER>>Value stock
When can the discretionary financing needed (DFN) be determined? - ANSWER>>After
pro-forma financial statements are forecasted using the percent of sales method
Which of the following would decrease the discretionary financing needed (DFN)? -
ANSWER>>Increase the plowback ratio
You are the financial manager of a company and have projected sales increase for next
year of 8%. Which of the following would you do when you conduct financial forecasting
using the percent of sales method? - ANSWER>>Leave the notes payable account
constant in the projected financial statements.
You are doing financial forecasting for your firm given the projected sales. You are
estimating changes in the balance sheet based upon the predicted change in sales.
What are you doing? - ANSWER>>Forecasting spontaneous accounts
The firm Betsy's Wigs is considering taking up three projects that are not mutually
exclusive. The IRR, NPV, and PI for all the projects in the table below. Use them to rank
all three projects by their order of acceptance to the firm for creating the most value.
Project IRR NPV PI
Project 1 23% $820 1.02
,Project 2 18% $880 1.27
Project 3 21% $790 1.35 - ANSWER>>Project 3, Project 2, Project 1
Projects are accepted in order of their PIs, from highest to lowest.
If a bond's YTM rose from 8% to 7%. Which of the following best predict what happens to
the bond price? - ANSWER>>It rises.
A project to expand an apartment complex may cost $100,000. It may have a calculated
net present value of $5,000. Which of the following is true? - ANSWER>>The project
should be rejected since it has a negative NPV.
Why is timing of cash flows an important characteristic of capital investment? -
ANSWER>>Timing of cash flows is related to the opportunity cost associated with those
cash flows.
What are incremental cash flows? - ANSWER>>Any additional cash flows, either into or
out of the firm, that are generated as a consequence of accepting a project
Which of the following is the condition that proves that an investment will add value to a
firm? - ANSWER>>The present value of the benefits from the investment exceed the
present value of the costs of the investment.
How do corporations and purchasers of financial securities view returns? -
ANSWER>>Purchasers of financial securities look towards returns as the amount of
money they need to have as an incentive to lend or give their money to the corporation
that issued those securities.
What would an analyst predict for a potential investment with an NPV of zero? -
ANSWER>>The project would earn exactly the rate of return required by the firm.
Why is it important for an ideal evaluation method of capital investment to consider cost
of capital? - ANSWER>>Because cash flows for a project may be uncertain
, Beckingham Sports is an American sporting goods company. Based on a $400,000
market study and a $600,000 fee for consulting spent prior to the project, the firm can
increase its annual operating cash flow by $3,000,000 by selling overseas. Because the
expansion was under consideration, the company bought a $2,000,000 parcel of land
that had been held in inventory, together with its associated equipment for the new
factory. An individual is now willing to pay $3,000,000 to the company for this land the
company purchased in contemplation for a new factory. Which one is relevant and
hence should be included in company's capital budgeting decision? -
ANSWER>>$3,000,000 selling price of land
You are analyzing a project with a profitability index of 1. What does this mean? -
ANSWER>>The internal rate of return of the project equals the cost of capital.
Why is it appropriate to calculate the value of a preferred stock in the same way you
would find the present value of a perpetuity? - ANSWER>>To the investors, a fixed
amount is paid forever to compensate them for owning a preferred stock.
Which of the following scenarios correctly describes opportunity cost? -
ANSWER>>Alexandra has a choice to spend $50 on some new clothes or to pay her
electric bill. The opportunity cost is having the electricity turned off.
How does management choose between two projects that are seemingly the same? -
ANSWER>>Management can analyze the different inherent risks that change the cost
of capital to the firm.
Why are various types of ratios used to analyze a firm? - ANSWER>>Because various
types of ratios are required to gain knowledge about different parts of a firm
A firm has been paying off its short-term loans more rapidly over the past two years.
What might this trend reveal about the firm's financial ratios? - ANSWER>>Its liquidity
ratio is improving.
100% VERIFIED 2025-2026!!
What is one way that a firm can improve its return on equity? - ANSWER>>Successfully
cutting production costs to boost net margin
BigDog and SmallDog are two companies that have an identical return on equity. One
difference between the two companies is that BigDog has 40% of assets financed by
debt while SmallDog has 100% of assets financed by equity. What can you conclude
about BigDog and SmallDog? - ANSWER>>SmallDog has a higher ROA than BigDog.
Since SmallDog has no debt, the leverage multiplier of SmallDog is smaller than that of
BigDog. Since both firms have the same ROE, SmallDog must have the higher ROA.
What actions, if taken simultaneously, would necessarily increase the ROE for a firm? -
ANSWER>>Less equity financing; more net margin
A company currently has a ratio of 1.5 but aspires to improve the ratio to 2 to better
meet the benchmark set by the industry. The goal was pursued by cutting costs in
production via an investment in efficient equipment and a higher profit margin was
realized by the company. If this were to continue, you are sure that in two years the firm
will achieve its goal. What is this an example of? - ANSWER>>Progress measurement
What ratio identifies the average length of time it takes, on average, for a firm to collect
accounts receivable? - ANSWER>>Average collection period
What does an average collection period of 70 indicate? - ANSWER>>On average a firm
takes 70 days to collect accounts receivable.
What does high inventory turnover relative to the industry and competitors reveal? -
ANSWER>>The firm does not have adequate inventory on hand and is making its
customers wait longer to take delivery of the goods purchased.
,What is the difference between ROA and ROE? - ANSWER>>ROE considers the capital
structure of a firm, whereas ROA does not.
Why are ratios useful for analyzing and comparing company performance between firms
of different sizes? - ANSWER>>They provide standardization.
What does a net margin of 7% mean? - ANSWER>>For every dollar of revenue, 7 cents
remain for the equity holders after all other costs are covered.
What is the term for the stock of a firm with market-to-book ratio of less than 1? -
ANSWER>>Value stock
When can the discretionary financing needed (DFN) be determined? - ANSWER>>After
pro-forma financial statements are forecasted using the percent of sales method
Which of the following would decrease the discretionary financing needed (DFN)? -
ANSWER>>Increase the plowback ratio
You are the financial manager of a company and have projected sales increase for next
year of 8%. Which of the following would you do when you conduct financial forecasting
using the percent of sales method? - ANSWER>>Leave the notes payable account
constant in the projected financial statements.
You are doing financial forecasting for your firm given the projected sales. You are
estimating changes in the balance sheet based upon the predicted change in sales.
What are you doing? - ANSWER>>Forecasting spontaneous accounts
The firm Betsy's Wigs is considering taking up three projects that are not mutually
exclusive. The IRR, NPV, and PI for all the projects in the table below. Use them to rank
all three projects by their order of acceptance to the firm for creating the most value.
Project IRR NPV PI
Project 1 23% $820 1.02
,Project 2 18% $880 1.27
Project 3 21% $790 1.35 - ANSWER>>Project 3, Project 2, Project 1
Projects are accepted in order of their PIs, from highest to lowest.
If a bond's YTM rose from 8% to 7%. Which of the following best predict what happens to
the bond price? - ANSWER>>It rises.
A project to expand an apartment complex may cost $100,000. It may have a calculated
net present value of $5,000. Which of the following is true? - ANSWER>>The project
should be rejected since it has a negative NPV.
Why is timing of cash flows an important characteristic of capital investment? -
ANSWER>>Timing of cash flows is related to the opportunity cost associated with those
cash flows.
What are incremental cash flows? - ANSWER>>Any additional cash flows, either into or
out of the firm, that are generated as a consequence of accepting a project
Which of the following is the condition that proves that an investment will add value to a
firm? - ANSWER>>The present value of the benefits from the investment exceed the
present value of the costs of the investment.
How do corporations and purchasers of financial securities view returns? -
ANSWER>>Purchasers of financial securities look towards returns as the amount of
money they need to have as an incentive to lend or give their money to the corporation
that issued those securities.
What would an analyst predict for a potential investment with an NPV of zero? -
ANSWER>>The project would earn exactly the rate of return required by the firm.
Why is it important for an ideal evaluation method of capital investment to consider cost
of capital? - ANSWER>>Because cash flows for a project may be uncertain
, Beckingham Sports is an American sporting goods company. Based on a $400,000
market study and a $600,000 fee for consulting spent prior to the project, the firm can
increase its annual operating cash flow by $3,000,000 by selling overseas. Because the
expansion was under consideration, the company bought a $2,000,000 parcel of land
that had been held in inventory, together with its associated equipment for the new
factory. An individual is now willing to pay $3,000,000 to the company for this land the
company purchased in contemplation for a new factory. Which one is relevant and
hence should be included in company's capital budgeting decision? -
ANSWER>>$3,000,000 selling price of land
You are analyzing a project with a profitability index of 1. What does this mean? -
ANSWER>>The internal rate of return of the project equals the cost of capital.
Why is it appropriate to calculate the value of a preferred stock in the same way you
would find the present value of a perpetuity? - ANSWER>>To the investors, a fixed
amount is paid forever to compensate them for owning a preferred stock.
Which of the following scenarios correctly describes opportunity cost? -
ANSWER>>Alexandra has a choice to spend $50 on some new clothes or to pay her
electric bill. The opportunity cost is having the electricity turned off.
How does management choose between two projects that are seemingly the same? -
ANSWER>>Management can analyze the different inherent risks that change the cost
of capital to the firm.
Why are various types of ratios used to analyze a firm? - ANSWER>>Because various
types of ratios are required to gain knowledge about different parts of a firm
A firm has been paying off its short-term loans more rapidly over the past two years.
What might this trend reveal about the firm's financial ratios? - ANSWER>>Its liquidity
ratio is improving.
