WGU C214 STUDY GUIDE 2025/2026 ANSWERS AND
QUESTIONS GRADED A+
✔✔If interest rates increase, what is the impact on WACC? - ✔✔Required returns on
both debt and equity increase - - thus WACC increases.
✔✔Why is the required return on stocks higher than bonds? - ✔✔Higher risk
✔✔The DuPont formula expands the ROE definition into what 3 ratios? - ✔✔Net
Margin, Total Asset Turnover, and Financial Leverage
✔✔What cash balance supports daily operations, that is, spontaneous accounts? -
✔✔Operating balance, as opposed to Reserve balance
✔✔Which cash flow statement reflects the daily operations of the firm? - ✔✔Cash flow
operations
✔✔What type of debt has a lower claim than bonds in bankruptcy proceedings? -
✔✔Subordinated debentures, i.e. subordinated debt
✔✔In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? -
✔✔Aversion to realizing losses; prefer to gamble on a recovery
✔✔More recent research on MM shows what? - ✔✔The debt-equity ratio does affect
WACC and the value of the firm
✔✔The Prospectus contains what information? - ✔✔Audited financials, description of
security being issued, risk factors for investor
✔✔Why is preferred stock described as a hybrid security? - ✔✔Fixed dividend like
bonds; no maturity like common stock - - less risk, less return than common stock
✔✔If ROE is greater than ROA, why does that occur? - ✔✔The firm has debt (i.e.
bonds) on the balance sheet
✔✔If the market value of the firm is 500, equity is 200, and equity cost is 6%, what is
equity part of WACC? - ✔✔(200/500) x .06 = 0.024
✔✔What is APY for a savings account paying 6% APR and daily compounding? - ✔✔(1
+ .06/365 ) ^ 365 = 1.0618 - 1 = .0618
✔✔What is the purpose of the SEC? - ✔✔To ensure that US public companies are
transparent to support efficient markets
, ✔✔Why would totally domestic firm worry about global finance? - ✔✔Competition from
foreign firm imports to US
✔✔If a firm automates its production line, what ratio increases? - ✔✔Fixed Asset
Turnover
✔✔What balance sheet items would cause the Current Ratio to change? - ✔✔Cash,
Inventory, Accounts Receivable, Accounts Payable, Accrued Expenses
✔✔If a firm uses cash to finance a project that has an expected return of 15%, what is
its cost of financing? - ✔✔Zero
✔✔What is term that refers to corporate managers acting in their own interests rather
than the stockholders? - ✔✔Agency Cost
✔✔What is difference between market order and limit order? - ✔✔Market order: execute
at prevailing market price. Limit: places a price restriction on order.
✔✔What are 3 functions of prices? - ✔✔Convey information, affect incentives, and
affect distribution of income
✔✔Which financial statement is a "snapshot" view of the firm - ✔✔Balance sheet
✔✔Which financial statement is a "summary of past activity" of the firm - ✔✔Income
statement and cash flow statement
✔✔What is a "secured loan" - ✔✔Firm pledges collateral to back the loan
✔✔What is net working capital - ✔✔Current assets minus current liabilities
✔✔What is capital budgeting? - ✔✔Evaluation of potential investment projects
✔✔What information is needed in capital budgeting - ✔✔Cash flows (initial, differential,
& terminal) and the discount rate.
✔✔What is "free cash flow" - ✔✔Cash flows from operations minus cash necessary for
reinvestment in PPE
✔✔How does ratings downgrade affect WACC? - ✔✔Increases it - - increased required
return on bonds.
✔✔Why would APY be greater than APR - ✔✔Interest compounded more frequently
than annually
QUESTIONS GRADED A+
✔✔If interest rates increase, what is the impact on WACC? - ✔✔Required returns on
both debt and equity increase - - thus WACC increases.
✔✔Why is the required return on stocks higher than bonds? - ✔✔Higher risk
✔✔The DuPont formula expands the ROE definition into what 3 ratios? - ✔✔Net
Margin, Total Asset Turnover, and Financial Leverage
✔✔What cash balance supports daily operations, that is, spontaneous accounts? -
✔✔Operating balance, as opposed to Reserve balance
✔✔Which cash flow statement reflects the daily operations of the firm? - ✔✔Cash flow
operations
✔✔What type of debt has a lower claim than bonds in bankruptcy proceedings? -
✔✔Subordinated debentures, i.e. subordinated debt
✔✔In a stock portfolio, why might the investor sell the "winners" and keep the "losers"? -
✔✔Aversion to realizing losses; prefer to gamble on a recovery
✔✔More recent research on MM shows what? - ✔✔The debt-equity ratio does affect
WACC and the value of the firm
✔✔The Prospectus contains what information? - ✔✔Audited financials, description of
security being issued, risk factors for investor
✔✔Why is preferred stock described as a hybrid security? - ✔✔Fixed dividend like
bonds; no maturity like common stock - - less risk, less return than common stock
✔✔If ROE is greater than ROA, why does that occur? - ✔✔The firm has debt (i.e.
bonds) on the balance sheet
✔✔If the market value of the firm is 500, equity is 200, and equity cost is 6%, what is
equity part of WACC? - ✔✔(200/500) x .06 = 0.024
✔✔What is APY for a savings account paying 6% APR and daily compounding? - ✔✔(1
+ .06/365 ) ^ 365 = 1.0618 - 1 = .0618
✔✔What is the purpose of the SEC? - ✔✔To ensure that US public companies are
transparent to support efficient markets
, ✔✔Why would totally domestic firm worry about global finance? - ✔✔Competition from
foreign firm imports to US
✔✔If a firm automates its production line, what ratio increases? - ✔✔Fixed Asset
Turnover
✔✔What balance sheet items would cause the Current Ratio to change? - ✔✔Cash,
Inventory, Accounts Receivable, Accounts Payable, Accrued Expenses
✔✔If a firm uses cash to finance a project that has an expected return of 15%, what is
its cost of financing? - ✔✔Zero
✔✔What is term that refers to corporate managers acting in their own interests rather
than the stockholders? - ✔✔Agency Cost
✔✔What is difference between market order and limit order? - ✔✔Market order: execute
at prevailing market price. Limit: places a price restriction on order.
✔✔What are 3 functions of prices? - ✔✔Convey information, affect incentives, and
affect distribution of income
✔✔Which financial statement is a "snapshot" view of the firm - ✔✔Balance sheet
✔✔Which financial statement is a "summary of past activity" of the firm - ✔✔Income
statement and cash flow statement
✔✔What is a "secured loan" - ✔✔Firm pledges collateral to back the loan
✔✔What is net working capital - ✔✔Current assets minus current liabilities
✔✔What is capital budgeting? - ✔✔Evaluation of potential investment projects
✔✔What information is needed in capital budgeting - ✔✔Cash flows (initial, differential,
& terminal) and the discount rate.
✔✔What is "free cash flow" - ✔✔Cash flows from operations minus cash necessary for
reinvestment in PPE
✔✔How does ratings downgrade affect WACC? - ✔✔Increases it - - increased required
return on bonds.
✔✔Why would APY be greater than APR - ✔✔Interest compounded more frequently
than annually
