WGU C214 Finance Management PVCC | PA |
Questions and Correct Answers plus Rationale |
Graded A+ | New Update 2026-2027
Question 1: Which financial ratio is used to measure a company's effectiveness
in extending credit as well as collecting debts?
A. AR turnover
B. Prospectus
C. Working capital
D. Municipal bonds
Correct Answer: A. AR turnover
Expert Rationale: The Accounts Receivable (AR) turnover ratio measures how
effectively a company extends credit and collects debts. It is calculated as Net
Credit Sales / Average Accounts Receivable. A higher AR turnover indicates
efficient collection processes and that the company is not extending credit to
customers who cannot pay. A lower ratio may suggest collection problems or
overly generous credit terms. Option B (Prospectus) is a legal document for
securities offerings. Option C (Working capital) is current assets minus current
liabilities. Option D (Municipal bonds) are debt securities issued by local
governments.
Question 2: Why does a long-term bond resemble an interest-only loan?
A. It reports the assets, liabilities, and equity at a point in time
B. Debt financing provides interest tax benefits
C. None of the principal is repaid until the bond matures
D. When market interest rates fluctuate, the bond coupon rate is unchanged
Correct Answer: C. None of the principal is repaid until the bond matures
Expert Rationale: A long-term bond resembles an interest-only loan because the
borrower (issuer) makes periodic interest payments but does not repay any of the
,principal until the bond matures. This is identical to an interest-only loan where
the borrower pays only interest during the loan term and repays the entire
principal at maturity. The principal (face value) is paid in full at maturity. Option A
describes a balance sheet. Option B describes a benefit of debt financing. Option
D describes how coupon rates remain fixed regardless of market fluctuations.
Question 3: Company Y has a greater degree of financial risk than Company Z.
What will happen if there is a 1% decrease in EBIT for both companies?
A. It will result in a greater percentage in Company Y's pre-tax profit
B. The firm is generating higher returns to owners than the industry
C. Net Sales / Average Net Fixed Assets
D. It reports the assets, liabilities, and equity at a point in time
Correct Answer: A. It will result in a greater percentage in Company Y's pre-tax
profit
Expert Rationale: A company with higher financial risk (more debt relative to
equity) will experience a greater percentage change in pre-tax profit for a given
change in EBIT. This is due to financial leverage, which magnifies the effect of
changes in EBIT on earnings. Company Y has a higher degree of financial risk, so a
1% decrease in EBIT will result in a greater percentage decrease in its pre-tax
profit compared to Company Z. Option B describes ROE comparison. Option C
describes asset turnover. Option D describes a balance sheet.
Question 4: A company issues bonds at a market price of $925. The face value is
$1,000. The bond matures in 10 years, and the coupon rate is 6% compounded
semiannually. What is the yield to maturity (YTM) on the company's bonds?
A. $34.15
B. 7.06%
C. $23,015
D. 4.28%
Correct Answer: B. 7.06%
,Expert Rationale: Since the bond is selling at a discount ($925 < $1,000), the yield
to maturity (YTM) must be higher than the coupon rate (6%). Using the bond
pricing formula: N = 20 (10 years × 2), PV = -925, PMT = 30 ($1,000 × 6% / 2), FV =
1,000, solve for I/Y. The resulting semiannual rate is approximately 3.53%, which
annualizes to 7.06%. The YTM represents the total return an investor can expect if
the bond is held to maturity, including both interest payments and capital gains.
Option A ($34.15) is a stock valuation result. Option C ($23,015) is a present value
calculation. Option D (4.28%) is too low for a discount bond.
Question 5: Company A has a degree of operating leverage of 1.85 and Company
B has a degree of operating leverage of 6.5. What does the degree of operating
leverage say about the two companies?
A. Company A must have a lower increase in sales than Company B to achieve the
same operating income
B. Net Sales / Average Net Fixed Assets
C. The firm is generating higher returns to owners than the industry
D. CAPM considers risk of a stock relative to the market to determine expected
returns
Correct Answer: A. Company A must have a lower increase in sales than
Company B to achieve the same operating income
Expert Rationale: A higher degree of operating leverage (DOL) indicates that a
company has higher fixed costs relative to variable costs, making its operating
income more sensitive to changes in sales. Company B with DOL of 6.5 would
experience a larger percentage change in operating income for a given sales
change than Company A with DOL of 1.85. Therefore, Company A requires a
smaller increase in sales to achieve the same operating income increase as
Company B. Option B describes asset turnover. Option C describes ROE. Option D
describes CAPM.
Question 6: What does free cash flow represent?
, A. None of the principal is repaid until the bond matures
B. Cash available for distribution after funding required reinvestment
C. CAPM considers risk of a stock relative to the market to determine expected
returns
D. It reports the assets, liabilities, and equity at a point in time
Correct Answer: B. Cash available for distribution after funding required
reinvestment
Expert Rationale: Free cash flow (FCF) represents the cash a company generates
after accounting for cash outflows to support operations and maintain its capital
assets. It is calculated as Operating Cash Flow minus Capital Expenditures. FCF is
the cash available for distribution to all providers of capital (both debt and equity
holders) after the company has made the investments necessary to sustain its
operations and growth. Option A describes bond characteristics. Option C
describes CAPM. Option D describes a balance sheet.
Question 7: What advantage does the capital asset pricing model (CAPM) have
over the Gordon growth model?
A. Because international investing in a global marketplace is the concern of
American investors
B. CAPM considers risk of a stock relative to the market to determine expected
returns
C. CAPM provides a way to determine the expected return for stocks
D. CAPM provides a way to estimate the required return
E. Skipping a declared preferred stock dividend results in dividends in arrears
Correct Answer: B. CAPM considers risk of a stock relative to the market to
determine expected returns
Expert Rationale: The key advantage of CAPM over the Gordon Growth Model is
that CAPM explicitly considers the systematic risk of a stock relative to the market
(measured by beta) to determine the expected return. CAPM uses the formula:
Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). The
Gordon Growth Model, in contrast, assumes a constant growth rate in dividends
and does not incorporate market risk. Options C and D describe benefits of CAPM
Questions and Correct Answers plus Rationale |
Graded A+ | New Update 2026-2027
Question 1: Which financial ratio is used to measure a company's effectiveness
in extending credit as well as collecting debts?
A. AR turnover
B. Prospectus
C. Working capital
D. Municipal bonds
Correct Answer: A. AR turnover
Expert Rationale: The Accounts Receivable (AR) turnover ratio measures how
effectively a company extends credit and collects debts. It is calculated as Net
Credit Sales / Average Accounts Receivable. A higher AR turnover indicates
efficient collection processes and that the company is not extending credit to
customers who cannot pay. A lower ratio may suggest collection problems or
overly generous credit terms. Option B (Prospectus) is a legal document for
securities offerings. Option C (Working capital) is current assets minus current
liabilities. Option D (Municipal bonds) are debt securities issued by local
governments.
Question 2: Why does a long-term bond resemble an interest-only loan?
A. It reports the assets, liabilities, and equity at a point in time
B. Debt financing provides interest tax benefits
C. None of the principal is repaid until the bond matures
D. When market interest rates fluctuate, the bond coupon rate is unchanged
Correct Answer: C. None of the principal is repaid until the bond matures
Expert Rationale: A long-term bond resembles an interest-only loan because the
borrower (issuer) makes periodic interest payments but does not repay any of the
,principal until the bond matures. This is identical to an interest-only loan where
the borrower pays only interest during the loan term and repays the entire
principal at maturity. The principal (face value) is paid in full at maturity. Option A
describes a balance sheet. Option B describes a benefit of debt financing. Option
D describes how coupon rates remain fixed regardless of market fluctuations.
Question 3: Company Y has a greater degree of financial risk than Company Z.
What will happen if there is a 1% decrease in EBIT for both companies?
A. It will result in a greater percentage in Company Y's pre-tax profit
B. The firm is generating higher returns to owners than the industry
C. Net Sales / Average Net Fixed Assets
D. It reports the assets, liabilities, and equity at a point in time
Correct Answer: A. It will result in a greater percentage in Company Y's pre-tax
profit
Expert Rationale: A company with higher financial risk (more debt relative to
equity) will experience a greater percentage change in pre-tax profit for a given
change in EBIT. This is due to financial leverage, which magnifies the effect of
changes in EBIT on earnings. Company Y has a higher degree of financial risk, so a
1% decrease in EBIT will result in a greater percentage decrease in its pre-tax
profit compared to Company Z. Option B describes ROE comparison. Option C
describes asset turnover. Option D describes a balance sheet.
Question 4: A company issues bonds at a market price of $925. The face value is
$1,000. The bond matures in 10 years, and the coupon rate is 6% compounded
semiannually. What is the yield to maturity (YTM) on the company's bonds?
A. $34.15
B. 7.06%
C. $23,015
D. 4.28%
Correct Answer: B. 7.06%
,Expert Rationale: Since the bond is selling at a discount ($925 < $1,000), the yield
to maturity (YTM) must be higher than the coupon rate (6%). Using the bond
pricing formula: N = 20 (10 years × 2), PV = -925, PMT = 30 ($1,000 × 6% / 2), FV =
1,000, solve for I/Y. The resulting semiannual rate is approximately 3.53%, which
annualizes to 7.06%. The YTM represents the total return an investor can expect if
the bond is held to maturity, including both interest payments and capital gains.
Option A ($34.15) is a stock valuation result. Option C ($23,015) is a present value
calculation. Option D (4.28%) is too low for a discount bond.
Question 5: Company A has a degree of operating leverage of 1.85 and Company
B has a degree of operating leverage of 6.5. What does the degree of operating
leverage say about the two companies?
A. Company A must have a lower increase in sales than Company B to achieve the
same operating income
B. Net Sales / Average Net Fixed Assets
C. The firm is generating higher returns to owners than the industry
D. CAPM considers risk of a stock relative to the market to determine expected
returns
Correct Answer: A. Company A must have a lower increase in sales than
Company B to achieve the same operating income
Expert Rationale: A higher degree of operating leverage (DOL) indicates that a
company has higher fixed costs relative to variable costs, making its operating
income more sensitive to changes in sales. Company B with DOL of 6.5 would
experience a larger percentage change in operating income for a given sales
change than Company A with DOL of 1.85. Therefore, Company A requires a
smaller increase in sales to achieve the same operating income increase as
Company B. Option B describes asset turnover. Option C describes ROE. Option D
describes CAPM.
Question 6: What does free cash flow represent?
, A. None of the principal is repaid until the bond matures
B. Cash available for distribution after funding required reinvestment
C. CAPM considers risk of a stock relative to the market to determine expected
returns
D. It reports the assets, liabilities, and equity at a point in time
Correct Answer: B. Cash available for distribution after funding required
reinvestment
Expert Rationale: Free cash flow (FCF) represents the cash a company generates
after accounting for cash outflows to support operations and maintain its capital
assets. It is calculated as Operating Cash Flow minus Capital Expenditures. FCF is
the cash available for distribution to all providers of capital (both debt and equity
holders) after the company has made the investments necessary to sustain its
operations and growth. Option A describes bond characteristics. Option C
describes CAPM. Option D describes a balance sheet.
Question 7: What advantage does the capital asset pricing model (CAPM) have
over the Gordon growth model?
A. Because international investing in a global marketplace is the concern of
American investors
B. CAPM considers risk of a stock relative to the market to determine expected
returns
C. CAPM provides a way to determine the expected return for stocks
D. CAPM provides a way to estimate the required return
E. Skipping a declared preferred stock dividend results in dividends in arrears
Correct Answer: B. CAPM considers risk of a stock relative to the market to
determine expected returns
Expert Rationale: The key advantage of CAPM over the Gordon Growth Model is
that CAPM explicitly considers the systematic risk of a stock relative to the market
(measured by beta) to determine the expected return. CAPM uses the formula:
Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). The
Gordon Growth Model, in contrast, assumes a constant growth rate in dividends
and does not incorporate market risk. Options C and D describe benefits of CAPM
