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Lectures On Corporate Finance – CMFAS Module 4a
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Question 1 of 30
1. Question
Which of the following do you consider to be true when it comes about major corporate finance decisions?
I. Debt decisions: the sum of money that is due.
II. Financing decisions: how assets are to be funded (debt or equity) also includes dividend decisions.
III. Investment decisions: determine the asset profile of business (amount and composition of investments).
IV. Dividend decisions: pay shareholder or retain funds for internal growth.Correct
Incorrect
Corporate financial decisions depend on how assets are to be funded, includes dividend decisions such as paying shareholder or retain funds for internal growth. The investment decision is another important aspect in determining the asset profile of the business.
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Question 2 of 30
2. Question
If your assets increased by $5,000 and your liabilities decreased by $3,000, how much your net worth would be?
Correct
Incorrect
The accounting formula for this is the following: Assets = Liabilities + Shareholders’ Equity. Considering this the correct answer is $8000.
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Question 3 of 30
3. Question
Knowing that increasing probability of bankruptcy comes with increasing financial leverage, which of the statement is considered to be true?
Correct
Incorrect
Bankruptcy happens when a business has lost more than what it originally put in as equity capital. In this case, the premium for financial risk should rise by more.
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Question 4 of 30
4. Question
Which of the following is not a concern related to capital budgeting?
Correct
Incorrect
When it comes to capital budgeting, the percentage of debt financing in the capital structure is not a concern.
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Question 5 of 30
5. Question
Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?
Correct
Incorrect
You would owe $1,200 after the first year and $1,440 after the second because you are being charged interest already accumulated. This means after year three you’d owe $1,728 and would owe double your original debt, or $2,000, before reaching the four-year mark.
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Question 6 of 30
6. Question
Which of the followings are true about Present Value (PV)?
I. Present value is the current value of a future sum of money or stream of cash flows given a specified rate of return.
II. Present value is the current value of a current sum of money or stream of cash flows given a specified rate of return.
III. Present value is part of the future value of a future sum of money or stream of cash flows given a specified rate of return.
IV. Present value is the current value of a future sum of money or stream of cash flows without a specified rate of return.Correct
Incorrect
Present Value calculates the present-day value of an amount that is received at a future date.
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Question 7 of 30
7. Question
If you invest a sum of $700 at a fixed rate of 8% per year with quarterly compounding. How many years will if of the $700 investment to reach a future value of $1,000?
Correct
Incorrect
Search for the 2% column of the FV of 1 Table for the future value factor that is closest to 1.429. So, the factor is 1.428, and we see it is located in the row where n = 18. To convert n = 18 quarters to years, we simply divide the 18 quarters by 4, the number of quarterly
periods in a year. The answer is that it will take approximately 4.5 years. -
Question 8 of 30
8. Question
What is the definition of finance?
Correct
Incorrect
Finance can be defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting.
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Question 9 of 30
9. Question
What does the dividend growth model show?
Correct
Incorrect
The dividend growth model is a valuation model, that grow at a constant rate each time period.
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Question 10 of 30
10. Question
What are the disadvantages of having a sole proprietorship?
I. Limited life to the owner.
II. Equity capital limited to owner’s personal wealth.
III. Unlimited liability.
IV. Difficult to transfer ownership.Correct
Incorrect
Besides the usual advantages of having a sole proprietorship, there are for sure some disadvantages too and some of the main ones in most cases refer to limited life to the owner, the equity capital is limited to owner’s personal wealth, unlimited liability and the difficult of transferring ownership.
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Question 11 of 30
11. Question
Imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After one year, would the money in the account buy more than it does today?
Correct
Incorrect
Inflation means prices are going up on items we buy, which means that the value of our money, goes down. A 2% inflation rate means the purchasing power of the money in your account decreases by 2%.
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Question 12 of 30
12. Question
Which is the best way to start the budgeting process?
Correct
Incorrect
Tracking all of the money spend for a period of time is the best tool for understanding how money is spent.
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Question 13 of 30
13. Question
What is discretionary income?
Correct
Incorrect
After all the taxes are paid what we are left with is called discretionary income.
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Question 14 of 30
14. 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. Net present value.
II. Internal rate of return.
III. Accounting rate of return.
IV. Payback.Correct
Incorrect
The best form of analysis in order to have a better overview of a variety of investment opportunities is the net present value.
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Question 15 of 30
15. Question
Net present value profile illustrates how the net present value of an investment is affected. By which one of the following?
Correct
Incorrect
NPV profile of a project or investment is a graph of the project’s net present value corresponding to different values of discount rates.
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Question 16 of 30
16. Question
What is compound interest in financial terms?
Correct
Incorrect
Compound interest is that interest earned on a sum of money that was previously earned as interest.
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Question 17 of 30
17. Question
What is a stakeholder?
I. Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
II. Is the main owner of the firm itself.
III. Is a creditor who has a debt to the firm.
IV. Is someone who was once interested in the firm, but no longer the case.Correct
Incorrect
A stakeholder is any person, organization, social group, or society at large that has a stake in the business. Thus, stakeholders can be internal or external to the business.
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Question 18 of 30
18. Question
In finance, working capital means the same thing as?
I. Total assets.
II. Fixed assets.
III. Current assets.
IV. Current assets minus current liabilities.Correct
Incorrect
In finance, working capital means the same thing as current assets minus current liabilities. Working capital is the amount of cash a business can safely spend.
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Question 19 of 30
19. Question
Someone purchased a home in 1980 for $100,000. The original mortgage loan was $90,000. The house has a current market value of $175,000, and he still owes $55,000 on the mortgage loan. How should the home be reflected on his current personal balance sheet?
I. $275,000 assets and $55,000 liabilities
II. $175,000 assets and $55,000 liabilities
III. $175,000 assets and $90,000 liabilities
IV. $100,000 assets and $90,000 liabilitiesCorrect
Incorrect
The current price of the house also called the asset is $175,000 and the mortgage loan (liability) is $55,000.
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Question 20 of 30
20. Question
What is called the process of organizing and planning your income, expenses, and savings to accomplish significant long-term goals?
Correct
Incorrect
Each individual through organizing and planning its income in order to accomplish its long-term goals is making a personal financial plan.
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Question 21 of 30
21. Question
What are the advantages of having a corporation?
I. Limited liability.
II. Unlimited life.
III. Separation of ownership and management.
IV. Transfer of ownership is easy.Correct
Incorrect
Some of the advantages of forming a corporation are limited liability, unlimited life, separation of ownership and management and transfer of ownership is easy.
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Question 22 of 30
22. Question
CFOs tend to use which of the methods of investment analysis the most frequently?
Correct
Incorrect
Payback and internal rate of return are the most used methods of investment analysis by CFOs.
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Question 23 of 30
23. Question
Which one of the following is an indicator that an investment is acceptable?
I. Negative average accounting return.
II. Modified internal rate of return equal to zero.
III. Internal rate of return that exceeds the required return.
IV. Payback period that exceeds the required periodCorrect
Incorrect
Every time the internal rate of return that exceeds the required return it means the investment was a good decision.
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Question 24 of 30
24. Question
Which one of the following indicates that a project is expected to create value for its owners?
Correct
Incorrect
If the average accounting rate of return is positive, then it means that a project should create value for its owners.
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Question 25 of 30
25. Question
Which one of the following defines the internal rate of return for a project?
I. The discount rate that creates a zero cash flow from assets.
II. The discount rate which results in a zero net present value for the project.
III. The discount rate which results in a net present value equal to the project’s initial cost.
IV. Rate of return required by the project’s investors.Correct
Incorrect
The internal rate of return for a project can be defined as the discount rate having as result the net present value which equals to the project’s initial cost.
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Question 26 of 30
26. Question
Which one of the following statements is correct?
Correct
Incorrect
The payback period, though, disregards the time value of money. It is determined by counting the number of years it takes to recover the funds invested.
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Question 27 of 30
27. Question
Two projects are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between these two projects?
I. Mutually exclusive.
II. Dual return.
III. Conventional.
IV. Crosswise.Correct
Incorrect
In capital budgeting, mutually-exclusive projects refer to a set of projects out of which only one project can be selected for investment.
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Question 28 of 30
28. Question
The payback period is the length of time it takes an investment to generate sufficient cash flows in order to enable the project. Which of the following is correct?
Correct
Incorrect
In order for a business to generate enough cash flow, it needs to recoup its initial cost.
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Question 29 of 30
29. Question
Considering that discounted cash flow valuation is the process of discounting an investment’s. Which of the following are valid?
Correct
Incorrect
The present value of future cash flows is the discounting cash you expect to receive in the future to the value at the current time.
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Question 30 of 30
30. Question
Which statement about trusts is true?
I. Compared with corporations, trusts provide greater tax advantages.
II. Compared with corporations, trusts provide fewer tax advantages.
III. Income usually passes through trusts, with corporate tax paid by the unitholders.
IV. Unitholders do not pay tax on the income received.Correct
Incorrect
There are some differences between corporations and trusts and one of the main ones is that the last one provides greater tax advantages.