CMFAS Module 4A Quiz 53

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Lectures On Corporate Finance – CMFAS Module 4a

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Question 1 of 30

1. Question
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
I. Payback.
II. Profitability index.
III. Accounting rate of return.
IV. Net present value.
- I & II
- II & III
- III & IV
- IV Only
Correct

Incorrect

Analyzing a variety of investment opportunities is best done by analysing the net present value.
Question 2 of 30

2. Question
The net present value profile illustrates how the net present value of an investment is affected by which one of the following?
- The real rate of return.
- Discount rate.
- Timing of the project's cash flows.
- Project's initial cost.
Correct

Incorrect

The discount rate shows how the net present value can be affected by an investment.
Question 3 of 30

3. Question
What happens to the market throughout the arbitrage process?
- Will force returns will not be the same, implying the degree of leverage have any impact on firm value and can be replicated by investors.
- Will force returns to be the same, implying the degree of leverage does not have any impact on firm value and cannot be replicated by investors.
- Will force returns to be the same, implying the degree of leverage will have an impact on firm value but it cannot be replicated by investors.
- Will force returns to be the same, implying the degree of leverage does not have any impact on firm value and can be replicated by investors.
Correct

Incorrect

Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price and it does not have any impact on firm value and can be replicated by investors.
Question 4 of 30

4. Question
Which is the key factor determining the discount rate or a proposal?
I. The timing of the expenditure (receipt).
II. The discount (interest) rate.
III. The low levels of risk associated with the project.
IV. The levels of risk associated with the project.
- I Only
- II & III
- IV Only
- All of the above
Correct

Incorrect

The key factor finding the discount rate can be determined through the levels of risk associated with the project.
Question 5 of 30

5. Question
What is unleveraged beta in finance?
- A measure of the risk of a firm as if it did not have leverage, which is equivalent to the beta of the firm’s debts.
- A measure of the risk of a firm as if it did not have leverage, which is equivalent to the beta of the firm’s assets.
- A measure of the risk of a firm as if it did not have leverage, which is not equivalent to the beta of the firm’s assets.
- A measure of the risk of a firm as they have leverage, which is equivalent to the beta of the firm’s assets.
Correct

Incorrect

Unleveraged beta in finance is the beta of a company without the impact of debt, a measure of the risk of a firm as if it did not have leverage.
Question 6 of 30

6. Question
According to the Modigliani–Miller approach, what is the cost of capital of a firm?
I. Remains constant throughout the project’s life irrespective of the capital structure.
II. It doesn’t stay constant throughout the project’s life irrespective of the capital structure.
III. It could stay constant throughout the project’s life irrespective of the bank loan.
IV. Remains constant throughout the project’s life irrespective of the debt of the firm.
- I Only
- II & IIII
- IV Only
- None of the above
Correct

Incorrect

The cost of capital of a firm based on the Modigliani–Miller approach stays constant throughout the project’s life irrespective of the capital structure.
Question 7 of 30

7. Question
Which of the following statements is true regarding the classical tax system?
- The classical system taxes company income is in the hands of the company and then it doesn't tax it again when that income is passed on to the company's shareholders as a dividend.
- The classical system taxes company income is in the hands of the company and then taxes it again when that income is passed on to the company's shareholders as a dividend.
- The classical system taxes company debt loans are in the hands of the company and then taxes it again when that income is passed on to the company's shareholders as a dividend.
- The classical system taxes company income is in the hands of the company and then taxes it again when that income is passed on to the company's shareholders as a debt.
Correct

Incorrect

A system of taxing companies in which the company is treated as a taxable entity separate from its own shareholders is called a classical tax system.
Question 8 of 30

8. Question
If a company tax has been paid, in each situation would most resident shareholders have a benefit?
- Profits are distributed as franked dividends rather than retained.
- Profits are distributed equally between all of them.
- The profit is invested back into the community.
- Profits are kept for future investment projects.
Correct

Incorrect

The resident shareholders have a benefit when the profits are distributed as franked dividends rather than retained.
Question 9 of 30

9. Question
Which of the following sentence is true?
- Favours equity rather than credit as a source of company finance when personal income tax rates are greater than company tax.
- Favours equity rather than debt as a source of company finance when personal income tax rates are smaller than company tax.
- Favours equity rather than debt as a source of company finance when financial income tax rates are greater than company tax.
- Favours equity rather than debt as a source of company finance when personal income tax rates are greater than company tax.
Correct

Incorrect

When personal income tax rates are greater than company tax favours equity rather than debt are a source of company finance.
Question 10 of 30

10. Question
What may financial distress do?
I. The costs of financial distress may also cause a company’s value to depend on receiving investments.
II. The costs of financial distress cannot cause a company’s value to depend on its capital structure.
III. The costs of financial distress may also cause a company’s losing its capital structure.
IV. The costs of financial distress may also cause a company’s value to depend on its capital structure.
- I & II
- II & III
- III Only
- IV Only
Correct

Incorrect

Financial distress can cause a company’s value to depend on its capital structure.
Question 11 of 30

11. Question
What is the distinction between serious and less serious cases of financial distress?
- The serious cases may lead to the liquidation of the company, while the less serious may lead the company to meet all its commitments but the mere possibility of financial difficulties can change people's behaviour.
- The serious cases may lead to the liquidation of the company, while the less serious may lead the company not to meet all its commitments but the mere possibility of financial difficulties can change people's behaviour.
- The serious cases may lead to the liquidation of the company, while the less serious may lead the company to meet all its commitments but the mere possibility of financial difficulties cannot change people's behaviour.
- The serious cases may lead to the debt of the company, while the less serious may lead the company to meet all its commitments but the mere possibility of financial difficulties can change people's behaviour.
Correct

Incorrect

The main difference between them is that that the serious cases may lead to the liquidation of the company, while the less serious in the possibility of financial difficulties it can change people’s behaviour.
Question 12 of 30

12. Question
By issuing risky debt, what does a company gives outsiders the possibility to do?
I. A potential claim against its assets, which must decrease the value of the company to its shareholders and/or its lenders.
II. A potential claim getting more assets, which must decrease the value of the company to its shareholders and/or its lenders.
III. A potential claim against its assets, which must increase the value of the company to its shareholders and/or its lenders.
IV. A potential claim against its assets, which must increase the value of the company and not to its shareholders.
- I Only
- II & III
- IV Only
- None of the above
Correct

Incorrect

A company gives outsiders the possibility to claim against its assets. These decrease the value of the company to its shareholders and/or its lenders.
Question 13 of 30

13. Question
Considering the third implication from Miller’s analysis, which of the following is correct?
- Companies are effectively required to compensate the lenders for the additional personal tax payable on interest income and lenders charge a lower interest rate on borrowings.
- Companies are effectively required to compensate the lenders for the additional personal tax payable on interest income --> lenders charge a higher interest rate on borrowings.
- Companies are not required to compensate the lenders for the additional personal tax payable on interest income --> lenders charge a higher interest rate on borrowings.
- Companies are not required to compensate the lenders for the additional personal tax payable on interest income and lenders charge a smaller interest rate on borrowings.
Correct

Incorrect

Based on Miller’s analysis, lenders charge a higher interest rate on borrowings. Also, companies need to compensate the lenders for any extra personal tax payable on interest income.
Question 14 of 30

14. Question
What is the key factor determining the discount rate or a proposal?
I. The level of assets associated with the project.
II. The level of credit needed to be associated with the project.
III. The level of risk associated with an additional project.
IV. The level of risk associated with the project.
- I & II
- II & III
- IV Only
- None of the above
Correct

Incorrect

When determining the discount rate of a project the most important aspect is the level of risk involved with it.
Question 15 of 30

15. Question
Which of the statements is true regarding arbitrage?
- Arbitrage involves buying an asset and simultaneously selling it for a higher price, usually in another market, so as to make a risk-free profit.
- Arbitrage involves buying an asset and not selling it for a higher price, usually in another market, so as to make a risk-free profit.
- Arbitrage involves buying an asset and simultaneously selling it for a lower price, usually in another market, so as to make a risk-free profit.
- Arbitrage involves buying an asset and simultaneously selling it for a higher price, usually in the same market, so as to make a risk-free profit.
Correct

Incorrect

When buying an asset and at the same time selling it for a higher price, usually in another market, this is called arbitrage.
Question 16 of 30

16. Question
How could the law of one price be described?
I. The cash flows of the debt and equity don’t equal to the sum to the cash flows of the project.
II. The cash flows of the debt and equity equal to the part of the sum to the cash flows of the project.
III. The cash flows of the credit and equity equal to the sum to the cash flows of the project.
IV. The cash flows of the debt and equity equal to the sum to the cash flows of the project.
- I Only
- II Only
- III Only
- IV Only
Correct

Incorrect

When the sum of the cash flows of the project equals the cash flows of the debt, this is called law of one price.
Question 17 of 30

17. Question
Which of the following sentences related to the Modigliani and Miller theory is true?
- With perfect capital markets, the total value of a firm should depend on its capital structure; the company is independent of its capital structure.
- With perfect capital markets, the total value of a firm should not depend on its capital structure; the company is dependent on its capital structure.
- With perfect capital markets, the company cannot be independent on its capital structure.
- With perfect capital markets, the total value of a firm should not depend on its capital structure; the company is independent of its capital structure.
Correct

Incorrect

In Modigliani and Miller theory, the total value of a firm should not depend on its capital structure, meaning the company itself is independent of the capital structure.
Question 18 of 30

18. Question
How would you describe the concept of risk independence?
- The cost of capital for a project does not depend on the characteristics of the company considering the project.
- The cost of capital for a project does depend on the characteristics of the company considering the project.
- The cost of capital for a project does depend only on some of the characteristics of the company considering the project.
- The cost of capital for a project could depend on the characteristics of the company considering the project.
Correct

Incorrect

Risk independence is called that situation when the cost of capital or a project is not depending on the attributes of the company considering the project.
Question 19 of 30

19. Question
Please define in financial terms what are issue costs when comes to the capital of a company?
I. Are costs that are incurred when receiving new capital such as underwriters’ fees, legal and maybe administrative fees.
II. Are costs that are incurred when a company received new investors for getting new capital.
III. Are costs that are incurred when using the old capital such as underwriters’ fees, legal and administrative fees.
IV. Are costs that are incurred when raising new capital such as underwriters’ fees, legal and administrative fees.
- I & II
- II Only
- IV Only
- None of the above
Correct

Incorrect

When a company tries to raise new capital such as underwriters’ fees, legal and administrative fees, are some costs that the firm is obliged to pay. These are called issue costs.
Question 20 of 30

20. Question
Why should WACC not be used to make financial decisions?
- It makes debt appear to be cheaper than equity.
- It makes assets appear to be cheaper than equity.
- It makes the debt appear to be more costly than equity.
- It makes credit appear to be harder to ger than equity.
Correct

Incorrect

WACC can make debt appear cheaper than equity.
Question 21 of 30

21. Question
What does the process of leasing allowing any usual company to do?
- It allows to partly own an asset from a competitor.
- It denies it to use an asset without owning it.
- It allows it to use an asset without owning it.
- It allows it to borrow an asset from a competitor.
Correct

Incorrect

Through the process of leasing, a company or a firm can use the goods or assets without having to directly own or buy them.
Question 22 of 30

22. Question
Select which of the following types of leases exist?
I. Cost-effective leases.
II. Financial leases.
III. Operating leases.
IV. Conditioning leases.
- I Only
- II Only
- II & III
- IV Only
Correct

Incorrect

Only the financial and operational lease is true when it comes to contractual arrangement.
Question 23 of 30

23. Question
Which of the following can be considered correct about a sales-type lease?
- The lessor is the manufacturer (or primary dealer) of the asset.
- The lessor can be sometimes manufacturer (or primary dealer) of the asset.
- The lessor is the stakeholder of the asset.
- The lessor is the main owner of a company.
Correct

Incorrect

A sales-type lease is that person also known as the primary dealer or as the manufacturer of the assets, or goods.
Question 24 of 30

24. Question
What is an operating lease?
- Is when lessors take all the risks and benefits of ownership of the asset for personal venture.
- It is a short-term rental agreement.
- It is a long-term rental agreement.
- It is partially short and long term rental agreement.
Correct

Incorrect

Each short-term rental agreement can be defined as an operating lease.
Question 25 of 30

25. Question
What does a takeover typically involve when someone acquires a company?
I. When a company decided to sell one of the company’s it owns.
II. The term refers to the acquisition of a public company whose shares are not listed on a stock exchange.
III. When a takeover is the purchase of one company (the target) by the same one.
IV. When an acquiring company acquires the controlling interest in the voting shares of a target company.
- I & II
- II & III
- Only IV
- None of the above
Correct

Incorrect

Shortly, takeover means when an investor buys another company it also controls the interest in the voting shares of a target company.
Question 26 of 30

26. Question
Which of the following would be true regarding the term synergy?
- The situation where the performance and therefore the value of a combined entity cannot exceed the sum of the present components.
- The situation where the performance and therefore the value of not combining entity exceeds the sum of the previously separate components.
- The situation where the performance and therefore the value of a combined entity doesn't exceeds the sum of the previously separate components.
- The situation where the performance and therefore the value of a combined entity exceeds the sum of the previously separate components.
Correct

Incorrect

In finance, synergy happens when the value of a combined entity is higher than the sum of the previously separate components.
Question 27 of 30

27. Question
Which of the following sentences can be true when gains from diversification are the largest?
- The gains from diversification are largest when there is a positive correlation between asset returns, but they still exist when there is a positive correlation between asset returns, provided that the correlation is always perfect.
- The gains from diversification are largest when there is a negative correlation between asset returns, but they still exist when there is a negative correlation between asset returns, provided that the correlation is less than perfect.
- The gains from diversification are largest when there is a positive correlation between asset returns, but they still exist when there is a positive correlation between asset returns, provided that the correlation is less than perfect.
- The gains from diversification are largest when there is a negative correlation between asset returns, but they still exist when there is a positive correlation between asset returns, provided that the correlation is less than perfect.
Correct

Incorrect

When there is a negative correlation between asset returns, the gains from diversification are the largest.
Question 28 of 30

28. Question
How could you define capital structure?
- The mix of credit and equity that it uses to finance its activities.
- The mix of debit and credit that it uses to finance its activities.
- The mix of debt and equity that it uses to finance its activities.
- The equity that it uses to finance its activities.
Correct

Incorrect

Capital structure is always a combination of debt and equity which is used for finance activities.
Question 29 of 30

29. Question
If a levered company is overvalued, what can happen to the investor in that company’s shares?
- Replicate partially the risk and return by not investing in the shares of an unlevered company and adjusting the debt-equity ratio by borrowing personally.
- Replicate his risk and return by investing instead in the shares of an unlevered company and adjusting the debt–equity ratio by borrowing more money.
- Replicate his risk and invest more money in the shares of an unlevered company and adjusting the debt-equity ratio by borrowing personally.
- Replicate his risk and return by investing instead in the shares of an unlevered company and adjusting the debt-equity ratio by borrowing personally.
Correct

Incorrect

When a company is overvalued, the investors need to adjust the debt-equity ratio by borrowing personally by investing instead in the shares of an unlevered company.
Question 30 of 30

30. Question
What does private equity include?
- Venture capital, which refers to the financing of new ventures or ‘start-up’ companies.
- Private equity is composed of funds that directly invest in private companies.
- Private equity is composed of investors that directly invest in private companies.
- Venture capital, which refers to the financing of existing ventures or ‘start-up’ companies.
Correct

Incorrect

In other words, private equity typically refers to investment funds only for new companies.

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