WGU D076 TEST QUESTIONS AND CORRECT ANSWERS
UPDATED 2025-2026!!
Why does a firm want capital investment?
To repay short-term loans
To purchase long-term assets for future growth - ANSWER>>To purchase long-term
assets for future growth. Firms must finance projects that will yield increased
shareholder wealth at some time in the future.
Which of the following techniques would you use to find the value of a bond?
The PV function in Excel
The perpetuity model
The IRR method
The constant growth model - ANSWER>>The PV function in Excel.
You are valuing a common stock. Which of the following is an assumption of this
valuation?
The growth rate is assumed to remain constant perpetually.
Coupon payments occur semi-annually
There is a maturity date.
Dividends are fixed. - ANSWER>>The growth rate is assumed to remain constant
perpetually. Valuation of common stock uses the constant growth model under the
assumption of constant growth rate forever.
What's the term to refer to the process of evaluating and planning for purchases of
long-term assets?
Capital budgeting
The time value of money - ANSWER>>Capital budgeting. Capital budgeting is the
process of evaluating and planning for purchases of long-term assets.
,Why is it important to have an accurate, carefully calculated required rate of return as
part of the NPV?
Lenders will only give a firm funds to invest in a project if the required rate of return is
highly accurate.
An inaccurate required rate estimate could cause a firm to reject good projects or
accept bad projects. - ANSWER>>An inaccurate required rate estimate could cause a
firm to reject good projects or accept bad projects! While the required rate of return is
the most difficult part of the NPV calculation to estimate, it is also the most important.
A firm must choose one of four projects in which to invest. Project 1 has an IRR of 14%
and an NPV of $54,000. Project 2 has an IRR of 11% and an NPV of $67,000. -
ANSWER>>Project 2 has an IRR of 11% and an NPV of $67,000. The project with the
highest NPV will add the most value to the firm.
Betsy's Wigs is a firm that is evaluating three projects, all of which are not mutually
exclusive. The various IRRs, NPVs and PIs are shown in the following table. Based on
the information provided in this table rank the projects, in order of acceptance by
Betsy's Wigs, which would maximize the value of the firm. - ANSWER>>THIS
QUESTION WILL GIVE IRR, NPV, AND PI.JUST CHOOSE THE HIGHEST PI TO THE
LOWEST
The YTM of a bond went from 8% to 7%. What can be predicted about the price of the
bond?
It is not possible to predict what will happen to the bond price.
It will increase.
It will stay the same.
It will decrease. - ANSWER>>It will increase. There is an inverse relationship between
Yield To Maturity and the price of a bond.
A possible project to expand an apartment complex will require an investment of
$100,000. Its projected net present value is $5,000. Based on these facts, which of the
following is true?
The project should be rejected because it has a negative NPV.
,It should accept the project since it has a positive NPV. - ANSWER>>It should accept
the project since it has a positive NPV. Since the NPV is positive, then the project must
be accepted.
Why is it important that all relevant cash flows be considered in an ideal method of
capital investment evaluation?
Since you can get the money early, then you can reinvest the cash earlier into different
projects.
Without considering every cash flow of a potential project, you do not know how the
project will enhance the value of a firm. - ANSWER>>Without considering every cash
flow of a potential project, you do not know how the project will enhance the value of a
firm. You need to include all the cash flows coming from a potential project to
understand how much value they will add to the firm.
Talia is comparing four mutually exclusive projects. Which of the following capital
budgeting methods should Talia use to determine the best project that will optimize the
goal of the firm?
Profitability index (PI)
Net present value (NPV)
IRR Internal rate of return - ANSWER>>NPV. When you compare mutually exclusive
projects, you want to see how much value is added by a project, since you can only do
one of them. Therefore, you would want to use the NPV method in choosing a project.
Alphabet Co. has $50,000 to invest in capital investment projects for the coming year. If
the company wants to maximize the total value created, how should it decide which
projects to invest in?
It should choose projects with the highest IRRs until all capital has been used.
It should choose projects with the highest NPVs until all capital has been used.
It should select the projects with the highest PIs until all capital has been used! -
ANSWER>>It should select the projects with the highest PIs until all capital has been
used! By selecting the projects with the highest PI, Alphabet Co. can maximize the value
created for the firm with its limited capital.
What is opportunity cost in relation to the time value of money?
, This is a situation where one has more investment opportunities than what he can
afford.
It is what you would call the opportunity given up because an investment's time scope
restricts you from venturing into something else. - ANSWER>>It's the opportunity one
gives up investing in another options due to a time scope set by an investment.
Opportunity Cost: basically cost that you will have to incur to fore go something as the
result of investments in something other things.
Why might the timing of cash flows be an important characteristic of a capital
investment?
Timing of cash flows is related to the opportunity cost associated with those cash flows.
Timing of cash flows is related to the sunk costs associated with those cash flows. -
ANSWER>>Timing of cash flows is related to the opportunity cost associated with those
cash flows. The cash flows of an investment need to be compared to the cash flows of
other projects.
Why does it always cost something to bring money into a business?
A business must compensate investors for the risk that they are taking to invest in the
business.
A business must compensate investors for the opportunity cost of investing in the
business. - ANSWER>>A business must compensate investors for the risk that they are
taking to invest in the business. Investors need a reason to part with their money.
What is the relationship between the risk and the rate of return?
The higher the risk investors have to take on, the higher return they require.
Rate of return describes the inherent risk of a project. - ANSWER>>The higher the risk
investors have to take on, the higher return they require! Investors will take on more risk
if there is potential for a higher return.
How can having more debt benefit a company?
Interest expense on debts is paid before the calculation of taxes.
Debt is never good for any company as it continuously increases its cost over time. -
ANSWER>> The interest expense on debts is paid before the calculation of taxes! This is
UPDATED 2025-2026!!
Why does a firm want capital investment?
To repay short-term loans
To purchase long-term assets for future growth - ANSWER>>To purchase long-term
assets for future growth. Firms must finance projects that will yield increased
shareholder wealth at some time in the future.
Which of the following techniques would you use to find the value of a bond?
The PV function in Excel
The perpetuity model
The IRR method
The constant growth model - ANSWER>>The PV function in Excel.
You are valuing a common stock. Which of the following is an assumption of this
valuation?
The growth rate is assumed to remain constant perpetually.
Coupon payments occur semi-annually
There is a maturity date.
Dividends are fixed. - ANSWER>>The growth rate is assumed to remain constant
perpetually. Valuation of common stock uses the constant growth model under the
assumption of constant growth rate forever.
What's the term to refer to the process of evaluating and planning for purchases of
long-term assets?
Capital budgeting
The time value of money - ANSWER>>Capital budgeting. Capital budgeting is the
process of evaluating and planning for purchases of long-term assets.
,Why is it important to have an accurate, carefully calculated required rate of return as
part of the NPV?
Lenders will only give a firm funds to invest in a project if the required rate of return is
highly accurate.
An inaccurate required rate estimate could cause a firm to reject good projects or
accept bad projects. - ANSWER>>An inaccurate required rate estimate could cause a
firm to reject good projects or accept bad projects! While the required rate of return is
the most difficult part of the NPV calculation to estimate, it is also the most important.
A firm must choose one of four projects in which to invest. Project 1 has an IRR of 14%
and an NPV of $54,000. Project 2 has an IRR of 11% and an NPV of $67,000. -
ANSWER>>Project 2 has an IRR of 11% and an NPV of $67,000. The project with the
highest NPV will add the most value to the firm.
Betsy's Wigs is a firm that is evaluating three projects, all of which are not mutually
exclusive. The various IRRs, NPVs and PIs are shown in the following table. Based on
the information provided in this table rank the projects, in order of acceptance by
Betsy's Wigs, which would maximize the value of the firm. - ANSWER>>THIS
QUESTION WILL GIVE IRR, NPV, AND PI.JUST CHOOSE THE HIGHEST PI TO THE
LOWEST
The YTM of a bond went from 8% to 7%. What can be predicted about the price of the
bond?
It is not possible to predict what will happen to the bond price.
It will increase.
It will stay the same.
It will decrease. - ANSWER>>It will increase. There is an inverse relationship between
Yield To Maturity and the price of a bond.
A possible project to expand an apartment complex will require an investment of
$100,000. Its projected net present value is $5,000. Based on these facts, which of the
following is true?
The project should be rejected because it has a negative NPV.
,It should accept the project since it has a positive NPV. - ANSWER>>It should accept
the project since it has a positive NPV. Since the NPV is positive, then the project must
be accepted.
Why is it important that all relevant cash flows be considered in an ideal method of
capital investment evaluation?
Since you can get the money early, then you can reinvest the cash earlier into different
projects.
Without considering every cash flow of a potential project, you do not know how the
project will enhance the value of a firm. - ANSWER>>Without considering every cash
flow of a potential project, you do not know how the project will enhance the value of a
firm. You need to include all the cash flows coming from a potential project to
understand how much value they will add to the firm.
Talia is comparing four mutually exclusive projects. Which of the following capital
budgeting methods should Talia use to determine the best project that will optimize the
goal of the firm?
Profitability index (PI)
Net present value (NPV)
IRR Internal rate of return - ANSWER>>NPV. When you compare mutually exclusive
projects, you want to see how much value is added by a project, since you can only do
one of them. Therefore, you would want to use the NPV method in choosing a project.
Alphabet Co. has $50,000 to invest in capital investment projects for the coming year. If
the company wants to maximize the total value created, how should it decide which
projects to invest in?
It should choose projects with the highest IRRs until all capital has been used.
It should choose projects with the highest NPVs until all capital has been used.
It should select the projects with the highest PIs until all capital has been used! -
ANSWER>>It should select the projects with the highest PIs until all capital has been
used! By selecting the projects with the highest PI, Alphabet Co. can maximize the value
created for the firm with its limited capital.
What is opportunity cost in relation to the time value of money?
, This is a situation where one has more investment opportunities than what he can
afford.
It is what you would call the opportunity given up because an investment's time scope
restricts you from venturing into something else. - ANSWER>>It's the opportunity one
gives up investing in another options due to a time scope set by an investment.
Opportunity Cost: basically cost that you will have to incur to fore go something as the
result of investments in something other things.
Why might the timing of cash flows be an important characteristic of a capital
investment?
Timing of cash flows is related to the opportunity cost associated with those cash flows.
Timing of cash flows is related to the sunk costs associated with those cash flows. -
ANSWER>>Timing of cash flows is related to the opportunity cost associated with those
cash flows. The cash flows of an investment need to be compared to the cash flows of
other projects.
Why does it always cost something to bring money into a business?
A business must compensate investors for the risk that they are taking to invest in the
business.
A business must compensate investors for the opportunity cost of investing in the
business. - ANSWER>>A business must compensate investors for the risk that they are
taking to invest in the business. Investors need a reason to part with their money.
What is the relationship between the risk and the rate of return?
The higher the risk investors have to take on, the higher return they require.
Rate of return describes the inherent risk of a project. - ANSWER>>The higher the risk
investors have to take on, the higher return they require! Investors will take on more risk
if there is potential for a higher return.
How can having more debt benefit a company?
Interest expense on debts is paid before the calculation of taxes.
Debt is never good for any company as it continuously increases its cost over time. -
ANSWER>> The interest expense on debts is paid before the calculation of taxes! This is
