WGU C214 Financial Management – Objective
Assessment – Verified Practice
Questions (120 items) All questions + correct
answers + short rationales
What is the primary goal of financial management? Answer: Maximization of shareholder
wealth Rationale: Modern finance theory states that the principal objective is to
maximize the current market value of the owners’ equity (shareholder wealth).
Agency costs arise primarily because of: Answer: Conflict of interest between managers and
shareholders Rationale: Managers (agents) may pursue personal goals instead of
maximizing shareholder value (principal’s goal) → classic agency problem.
Which ratio measures a firm’s ability to pay short-term obligations using only its most liquid
assets? Answer: Quick ratio (acid-test ratio) Rationale: Quick ratio = (Cash +
Marketable securities + Receivables) / Current liabilities — excludes inventory.
A firm has current ratio = 2.0 and quick ratio = 0.8. This most likely means the firm has a
relatively high amount of: Answer: Inventory Rationale: Large difference between
current and quick ratio indicates significant inventory (which is excluded from quick
assets).
Using DuPont analysis, ROE = Profit margin × Asset turnover × Equity multiplier. If ROE
increases while profit margin and asset turnover stay constant, the change most likely
came from: Answer: Increased financial leverage (higher equity multiplier) Rationale:
Equity multiplier = Total assets / Equity — higher value means more debt relative to
equity.
, The DuPont identity breaks ROE into three components. Which component is most directly
affected by a firm’s financing decisions? Answer: Equity multiplier Rationale:
Financing decisions (amount of debt vs equity) directly change the equity multiplier.
A firm has net income $120,000, sales $1,200,000, total assets $800,000, equity $400,000.
What is the return on equity (ROE)? Answer: 30% Rationale: ROE = Net income /
Equity = 120,,000 = 0.30 = 30%
Which of the following is NOT included in the calculation of the quick ratio? Answer:
Inventory Rationale: Quick ratio excludes less liquid current assets (inventory and
prepaid expenses).
Times interest earned (TIE) ratio is calculated as: Answer: EBIT / Interest expense
Rationale: Measures how many times operating earnings can cover interest payments.
A high inventory turnover ratio generally indicates: Answer: Efficient inventory
management Rationale: High turnover → inventory is sold quickly, reducing holding
costs and obsolescence risk.
The formula for the present value of an ordinary annuity is: Answer: PMT × [1 – (1 + r)^(-
n)] / r Rationale: Standard ordinary annuity PV factor formula.
The present value of a perpetuity is calculated as: Answer: PMT / r Rationale: Perpetuity
has no maturity → PV = cash flow per period divided by discount rate.
A project has an initial outlay of $50,000 and generates $15,000 per year for 5 years.
Discount rate = 10%. Approximate NPV? (PV annuity factor ≈ 3.7908) Answer: ≈
$6,862 Rationale: PV of cash flows = 15,000 × 3.7908 ≈ 56,862 → NPV = 56,862 –
50,000 = 6,862
Assessment – Verified Practice
Questions (120 items) All questions + correct
answers + short rationales
What is the primary goal of financial management? Answer: Maximization of shareholder
wealth Rationale: Modern finance theory states that the principal objective is to
maximize the current market value of the owners’ equity (shareholder wealth).
Agency costs arise primarily because of: Answer: Conflict of interest between managers and
shareholders Rationale: Managers (agents) may pursue personal goals instead of
maximizing shareholder value (principal’s goal) → classic agency problem.
Which ratio measures a firm’s ability to pay short-term obligations using only its most liquid
assets? Answer: Quick ratio (acid-test ratio) Rationale: Quick ratio = (Cash +
Marketable securities + Receivables) / Current liabilities — excludes inventory.
A firm has current ratio = 2.0 and quick ratio = 0.8. This most likely means the firm has a
relatively high amount of: Answer: Inventory Rationale: Large difference between
current and quick ratio indicates significant inventory (which is excluded from quick
assets).
Using DuPont analysis, ROE = Profit margin × Asset turnover × Equity multiplier. If ROE
increases while profit margin and asset turnover stay constant, the change most likely
came from: Answer: Increased financial leverage (higher equity multiplier) Rationale:
Equity multiplier = Total assets / Equity — higher value means more debt relative to
equity.
, The DuPont identity breaks ROE into three components. Which component is most directly
affected by a firm’s financing decisions? Answer: Equity multiplier Rationale:
Financing decisions (amount of debt vs equity) directly change the equity multiplier.
A firm has net income $120,000, sales $1,200,000, total assets $800,000, equity $400,000.
What is the return on equity (ROE)? Answer: 30% Rationale: ROE = Net income /
Equity = 120,,000 = 0.30 = 30%
Which of the following is NOT included in the calculation of the quick ratio? Answer:
Inventory Rationale: Quick ratio excludes less liquid current assets (inventory and
prepaid expenses).
Times interest earned (TIE) ratio is calculated as: Answer: EBIT / Interest expense
Rationale: Measures how many times operating earnings can cover interest payments.
A high inventory turnover ratio generally indicates: Answer: Efficient inventory
management Rationale: High turnover → inventory is sold quickly, reducing holding
costs and obsolescence risk.
The formula for the present value of an ordinary annuity is: Answer: PMT × [1 – (1 + r)^(-
n)] / r Rationale: Standard ordinary annuity PV factor formula.
The present value of a perpetuity is calculated as: Answer: PMT / r Rationale: Perpetuity
has no maturity → PV = cash flow per period divided by discount rate.
A project has an initial outlay of $50,000 and generates $15,000 per year for 5 years.
Discount rate = 10%. Approximate NPV? (PV annuity factor ≈ 3.7908) Answer: ≈
$6,862 Rationale: PV of cash flows = 15,000 × 3.7908 ≈ 56,862 → NPV = 56,862 –
50,000 = 6,862
