final

Question 1

The primary goal of a firm’s financial management is to:
A) Maximize profits
B) Maximize shareholder wealth
C) Minimize costs
D) Ensure company growth

Answer 1

B

Question 2

The primary role of a financial manager includes all of the following except:
A) Investment decision-making
B) Financing decision-making
C) Dividend decision-making
D) Human resource management

Answer 2

D

Question 3

In the Capital Asset Pricing Model (CAPM), “beta” measures:
A) Total risk of the asset
B) Unsystematic risk only
C) Systematic risk of the asset
D) The market risk premium

Answer 3

C

Question 4

Which of the following is NOT a capital budgeting technique?
A) Net Present Value (NPV)
B) Internal Rate of Return (IRR)
C) Payback Period
D) Return on Equity (ROE)

Answer 4

D

Question 5

A project with a positive NPV indicates that the project will:
A) Add value to the firm and should be accepted
B) Destroy value and should be rejected
C) Have a zero rate of return
D) Have an IRR lower than the cost of capital

Answer 5

A

Question 6

Which ratio is used to measure a company’s financial leverage?
A) Current ratio
B) Quick ratio
C) Debt-to-equity ratio
D) Gross profit margin

Answer 6

C

Question 7

The Weighted Average Cost of Capital (WACC) represents:
A) The overall cost of financing (debt, equity, preferred)
B) The cost of equity financing only
C) The cost of debt financing only
D) The rate used to calculate payback periods

Answer 7

A

Question 8

A primary market transaction is best described as:
A) Trading of existing securities among investors
B) A company issuing new securities
C) An investor selling shares to another investor
D) A company repurchasing its own stock

Answer 8

B

Question 9

A sunk cost is defined as:
A) A future cost contingent on a project decision
B) A cost already incurred that cannot be recovered
C) The opportunity cost of choosing one project over another
D) A cost that can be avoided if the project is not undertaken

Answer 9

B

Question 10

If a bond’s coupon rate is higher than the prevailing market rate, the bond will sell at:
A) Par value
B) A discount
C) A premium
D) A loss

Answer 10

C

Question 11

The quick ratio is calculated as:
A) (Current Assets – Inventory) / Current Liabilities
B) Current Assets / Current Liabilities
C) (Inventory + Accounts Receivable) / Current Liabilities
D) (Cash + Inventory) / Current Liabilities

Answer 11

A

Question 12

The internal rate of return (IRR) is defined as:
A) The discount rate that makes the NPV of a project zero
B) The expected return on a project’s equity
C) The cost of capital for the project
D) The time required to break even

Answer 12

A

Question 13

An increase in a firm’s debt ratio will generally:
A) Decrease the firm’s overall risk
B) Increase the firm’s financial leverage
C) Leave the WACC unchanged
D) Reduce the firm’s beta

Answer 13

B

Question 14

A key limitation of the payback period method is that it:
A) Considers all cash flows
B) Ignores the time value of money
C) Focuses only on long-term cash flows
D) Requires complex calculations

Answer 14

B

Question 15

Which of the following methods can be used to estimate the cost of equity?
A) Dividend Discount Model (DDM)
B) Capital Asset Pricing Model (CAPM)
C) Earnings Capitalization Approach
D) All of the above

Answer 15

D

Question 16

The opportunity cost of capital is best defined as:
A) The interest rate on borrowed funds
B) The return foregone on the next best investment alternative
C) The cost associated with issuing new equity
D) The accounting cost of capital

Answer 16

B

Question 17

In bond valuation, the price of a bond is the sum of the present value of its:
A) Future coupon payments and face value
B) Coupon payments only
C) Face value only
D) Future market prices

Answer 17

A

Question 18

If market interest rates rise, the price of an existing bond will generally:
A) Increase
B) Decrease
C) Remain the same
D) Become more volatile without a predictable direction

Answer 18

B

Question 19

The primary source of long-term financing for most firms is:
A) Trade credit
B) Short-term bank loans
C) Bonds and equity
D) Accounts payable

Answer 19

C

Question 20

A security’s systematic risk is measured by:
A) Its variance
B) Its beta coefficient
C) Its standard deviation
D) Its alpha

Answer 20

B

Question 21

A firm’s market capitalization is calculated as:
A) Total assets multiplied by the stock price
B) The number of shares outstanding times the current stock price
C) The book value of equity
D) Total liabilities plus equity

Answer 21

B

Question 22

A firm’s dividend policy can affect:
A) The firm’s cost of equity
B) The growth rate of the firm
C) Investors’ perception of financial health
D) All of the above

Answer 22

D

Question 23

The effective annual rate (EAR) is used to:
A) Compare interest rates with different compounding frequencies
B) Determine the nominal rate
C) Measure inflation
D) Calculate the payback period

Answer 23

A

Question 24

In discounted cash flow (DCF) valuation, future cash flows are:
A) Estimated solely using historical data
B) Not adjusted for risk
C) Discounted back to the present using an appropriate discount rate
D) Assumed to grow at a constant rate indefinitely

Answer 24

C

Question 25

In the CAPM, the market risk premium is defined as: A) The risk-free rate B) The excess return of the market over the risk-free rate C) The return on the market portfolio D) The standard deviation of market returns

Answer 25

B

Question 26

In capital structure, “leverage” refers to: A) The use of debt to finance assets B) Increasing the number of shares outstanding C) Reinvesting earnings into the business D) Issuing employee stock options

Answer 26

A

Question 27

One reason the cost of debt is generally lower than the cost of equity is that: A) Debt holders take on more risk B) Interest payments are tax deductible C) Debt is riskier for the firm D) Equity requires fixed dividend payments

Answer 27

B

Question 28

Flotation costs are: A) The costs incurred when issuing new securities B) Fees paid for handling physical assets C) The interest expense on new debt D) The costs of converting debt to equity

Answer 28

A

Question 29

When evaluating a project, the cash flows considered should be its: A) Sunk costs B) Incremental (differential) cash flows C) Allocated fixed costs D) Historical costs

Answer 29

B

Question 30

The profitability index (PI) is calculated by: A) Dividing the NPV by the initial investment B) Dividing the future value of cash flows by the initial investment C) Dividing the initial investment by the NPV D) Dividing the cash flow ratio by total assets

Answer 30

A

Question 31

The “duration” of a bond is a measure of: A) Its coupon rate B) Its price sensitivity to changes in interest rates C) Its time to maturity D) Its yield to maturity

Answer 31

B

Question 32

An increase in the corporate tax rate will have what effect on the after-tax cost of debt? A) Increase it B) Decrease it C) Have no effect D) Double it

Answer 32

B

Question 33

Financial leverage tends to: A) Amplify only profits B) Amplify only losses C) Amplify both profits and losses D) Have no effect on earnings volatility

Answer 33

C

Question 34

The residual income valuation method is based on: A) Dividend payments B) Book value alone C) Net income minus a charge for the cost of capital D) Free cash flow

Answer 34

C

Question 35

According to the Modigliani–Miller theorem (without taxes), the firm’s value is independent of its: A) Capital structure B) Cost of equity C) Dividend policy D) Asset mix

Answer 35

A

Question 36

In cost of capital calculations, the risk-free rate is most often based on: A) Corporate bonds B) Treasury bills or government bonds C) The average market return D) Commercial paper rates

Answer 36

B

Question 37

A firm’s beta is likely to change if the firm alters its: A) Capital structure B) Dividend payout C) Earnings retention D) Product mix

Answer 37

A

Question 38

A major advantage of the NPV method is that it: A) Ignores the time value of money B) Provides a direct measure of the added value to the firm C) Requires no estimate of the discount rate D) Is simpler to compute than the payback period

Answer 38

B

Question 39

The reinvestment rate assumption inherent in the IRR method is that: A) All cash flows are reinvested at the project’s IRR B) All cash flows are reinvested at the risk-free rate C) No cash flows are reinvested D) Cash flows are reinvested at the firm’s WACC

Answer 39

A

Question 40

A drawback of the payback period method is that it: A) Provides a measure of liquidity B) Considers the full stream of cash flows C) Ignores cash flows after the payback period D) Requires complex discounting calculations

Answer 40

C

Question 41

Incremental cash flows are defined as those cash flows that: A) Would occur regardless of the project decision B) Are generated only if the project is accepted C) Include sunk costs D) Consist of non-cash accounting entries

Answer 41

B

Question 42

“Market value” in a firm’s capital structure refers to: A) The historical book value of assets B) The current market value of equity and debt C) The original issue price of securities D) The firm’s profit margin

Answer 42

B

Question 43

Which of the following is most directly related to a firm’s working capital management? A) Long-term debt issuance B) Inventory control C) Capital budgeting decisions D) Dividend policy

Answer 43

B

Question 44

The cost of retained earnings is generally considered to be: A) Zero B) Equal to the cost of new equity C) Lower than the cost of new equity D) The same as the cost of debt

Answer 44

B

Question 45

In a leveraged buyout (LBO), the acquiring firm typically finances the acquisition primarily with: A) Equity B) Debt C) A balanced mix of debt and equity D) Retained earnings only

Answer 45

B

Question 46

The cash conversion cycle measures the time it takes for a company to: A) Convert inventory into cash B) Convert receivables into inventory C) Convert debt into equity D) Generate cash from financing activities

Answer 46

A

Question 47

The book value of equity often differs from the market value because the market value: A) Includes intangible assets B) Reflects growth prospects and investor sentiment C) Is always higher than book value D) Is based solely on historical cost

Answer 47

B

Question 48

The equity risk premium is defined as the difference between: A) The risk-free rate and the market return B) The return on the market portfolio and the risk-free rate C) The cost of debt and the cost of equity D) The book value and market value of equity

Answer 48

B

Question 49

Capital budgeting decisions are influenced by all of the following except: A) The firm’s available cash B) The cost of capital C) Expected project cash flows D) Historical cost accounting

Answer 49

D

Question 50

A project with a shorter payback period is generally considered to be: A) Riskier due to long-term uncertainty B) Less risky because the initial investment is recovered sooner C) Less profitable regardless of cash flows D) More risky than a project with a longer payback period

Answer 50

B

Question 51

In finance, “leverage” most commonly refers to: A) Using derivatives to hedge risk B) Using debt to finance investments C) Using retained earnings for expansion D) Maintaining high cash reserves

Answer 51

B

Question 52

The yield to maturity (YTM) of a bond is defined as: A) Its coupon rate B) The rate that discounts all future cash flows to the bond’s current price C) Its nominal yield D) The current market interest rate only

Answer 52

B

Question 53

A limitation of the NPV method is that it: A) Ignores the time value of money B) Requires an accurate estimate of the discount rate C) Does not consider the scale of the project D) Is too simplistic for complex projects

Answer 53

B

Question 54

In CAPM, the beta coefficient reflects: A) The asset’s total volatility B) The asset’s sensitivity to market movements C) The risk-free rate D) The asset’s idiosyncratic risk

Answer 54

B

Question 55

Discounting future cash flows to their present value is based on the principle of the: A) Inflation effect B) Time value of money C) Opportunity cost D) Efficient market hypothesis

Answer 55

B

Question 56

A project is acceptable under the IRR rule if its IRR is: A) Less than the cost of capital B) Equal to the cost of capital C) Greater than the cost of capital D) Zero

Answer 56

C

Question 57

In investment analysis, “alpha” is best described as the: A) Excess return over a benchmark B) Systematic risk of a portfolio C) Correlation coefficient D) Market risk premium

Answer 57

A

Question 58

A higher debt-to-equity ratio generally indicates: A) Lower financial risk B) Higher financial risk C) Lower cost of capital D) Better liquidity

Answer 58

B

Question 59

The risk-free rate is most commonly derived from the yields on: A) Corporate bonds B) Government securities C) Municipal bonds D) Commercial paper

Answer 59

B

Question 60

If a project’s NPV is negative, it implies that the project is expected to: A) Add value to the firm B) Destroy value C) Have cash flows that exceed the cost of capital D) Be accepted for strategic reasons

Answer 60

B

Question 61

A common formula for adjusting beta for leverage is: A) Adjusted Beta = Unlevered Beta × [1 + (1 – Tax Rate) × (Debt/Equity)] B) Adjusted Beta = Levered Beta / [1 + (Debt/Equity)] C) Adjusted Beta = Levered Beta × (1 + Debt/Equity) D) Adjusted Beta = Unlevered Beta / [1 + (1 – Tax Rate) × (Debt/Equity)]

Answer 61

A

Question 62

When comparing two mutually exclusive projects, which decision criterion is most appropriate? A) Payback Period B) Net Present Value (NPV) C) Accounting Rate of Return D) Profitability Index

Answer 62

B

Question 63

The Dividend Discount Model (DDM) is based on the premise that a stock’s value is equal to the present value of its: A) Future earnings B) Future dividends C) Book value of equity D) Sales growth

Answer 63

B

Question 64

A bond trading at a discount generally has a coupon rate that is: A) Higher than the market rate B) Lower than the market rate C) Equal to the market rate D) Unrelated to the market rate

Answer 64

B

Question 65

In bond analysis, “duration” measures primarily the bond’s: A) Credit risk B) Interest rate risk C) Liquidity D) Inflation risk

Answer 65

B

Question 66

Which of the following is most likely to increase a firm’s WACC? A) An increase in the cost of equity B) A decrease in the cost of debt C) A higher proportion of lower-cost debt financing D) An increase in the corporate tax rate

Answer 66

A

Question 67

Which financial metric directly estimates the value a project adds to a firm? A) Payback Period B) Net Present Value (NPV) C) Internal Rate of Return (IRR) D) Accounting Rate of Return (ARR)

Answer 67

B

Question 68

Capital budgeting involves the process of: A) Evaluating potential long-term investment projects B) Deciding on short-term financing strategies C) Managing day-to-day cash flows D) Setting dividend policy

Answer 68

A

Question 69

When interest rates are volatile, bonds with longer durations tend to exhibit: A) Less price volatility B) More price volatility C) No change in price volatility D) Lower returns

Answer 69

B

Question 70

In financial management, the term “cost of capital” refers to: A) The cost incurred when raising funds for new projects B) The historical cost of assets C) The market value of a firm’s equity D) The depreciation expense recorded by a firm

Answer 70

A