WGU Updated Financial-Management Exam Questions and Answers by reeva

The CAPM assists in investment decisions by helping investors and financial managers evaluate the relationship between risk and expected return. The model states that the expected return on a security equals the risk-free rate plus a risk premium based on the security’s beta and the market risk premium. In this way, CAPM provides a structured method for deciding whether the expected return of a stock is adequate given its level of systematic risk. Choice C is correct because this risk-return trade-off is the core purpose of the model. CAPM does not predict exact future prices, so choice B is incorrect. It also does not apply only to dividend-paying stocks, making choice A incorrect. Choice D is incorrect because no financial model can guarantee returns in an uncertain market. In financial management, CAPM is widely used to estimate the cost of common equity, evaluate investment performance, and compare required return across securities with different risk levels. Therefore, C is the best answer because CAPM is designed to support investment decisions by linking expected return to systematic market risk.

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Receivables turnover measures how efficiently a firm collects cash from its credit customers. It is calculated as Credit Sales ÷ Average Accounts Receivable and indicates how many times receivables are collected during the period. A higher receivables turnover ratio suggests faster collection, improved liquidity, and lower risk of bad debts. Effective receivables management reduces the firm’s need for external financing and supports smoother cash flows. Financial managers closely monitor this ratio to evaluate credit policies and collection efficiency. Option B correctly identifies the ratio designed specifically to assess receivables conversion into cash.

This question applies the Gordon growth (constant growth dividend discount) model, which values a stock as the present value of an infinite stream of dividends growing at a constant rate. The model assumes that dividends grow steadily and that the required rate of return exceeds the growth rate, ensuring a finite value. The formula is:

Stock Value = D₁ ÷ (r − g),

where D₁ is the dividend expected next year, r is the required rate of return, and g is the growth rate. If the current dividend is $5, the next dividend equals $5 × (1 + 0.03) = $5.15. Substituting into the formula gives:

$5.15 ÷ (0.09 − 0.03) = $5.15 ÷ 0.06 = $85.83.

This valuation approach is commonly used for mature firms with stable dividend policies and predictable growth. Financial managers and analysts rely on this model to estimate intrinsic stock value and assess whether a stock is overvalued or undervalued relative to its market price.

The payback period measures how long it takes for a project’s cumulative cash inflows to recover the initial investment. It is a simple capital budgeting technique commonly used as a preliminary screening tool. Although it does not account for the time value of money or cash flows beyond the cutoff period, it is useful for assessing liquidity and risk exposure.

Cumulative cash flows are calculated as follows:

End of Year 1: $125,000

End of Year 2: $250,000

End of Year 3: $390,000

End of Year 4: $530,000

The initial investment of $410,000 is recovered sometime during Year 4. Because the question instructs to round up, the payback period is reported as 4 years. Financial management textbooks emphasize that while payback should not be used alone to accept or reject projects, it provides insight into how quickly invested capital is recovered, which is especially relevant for projects with uncertainty or liquidity constraints.