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Lectures On Corporate Finance – CMFAS Module 4a
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Question 1 of 30
1. Question
What does the concept budgeting mean in finance?
Correct
Incorrect
A budget is a financial plan for a defined period, often one year which is established based on the available income of each individual.
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Question 2 of 30
2. Question
Which one of the following can be defined as a benefit-cost ratio?
I. Net present value.
II. Internal rate of return.
III. Profitability index.
IV. Accounting rate of return.Correct
Incorrect
A benefit-cost ratio is an indicator, used in cost-benefit analysis, and profitability index can be defined as such.
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Question 3 of 30
3. Question
Which of the following statement from below regarding the net present value is true?
Correct
Incorrect
In finance, the present value decreases as the required rate of return increases.
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Question 4 of 30
4. Question
The owner of a firm is unfamiliar with financial analysis and wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?
Correct
Incorrect
The profitability index financial method of analysis is the financial method that will provide the information owner needs.
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Question 5 of 30
5. Question
What is arbitrage?
I. Two identical assets being traded in the same market must have the same price.
II. A risk-free profit could be made by simultaneously purchasing at a lower price and selling at the same price.
III. Arbitrage is considered high risk for the investor or trader.
IV. Arbitrage happens when a security is purchased in one market and simultaneously sold in another at a higher price.Correct
Incorrect
when a security is purchased in one market and simultaneously sold in another at a higher price then arbitrage happens.
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Question 6 of 30
6. Question
How do you calculate the price of a bond?
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Incorrect
The formula for bond pricing is basically the calculation of the present value of the probable future cash flows which comprises of the coupon payments and the par value which is the redemption amount on maturity.
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Question 7 of 30
7. Question
In the probability of bankruptcy with increasing financial leverage, the business presents some risks. What can be expected in this case?
I. The premium for a business risk to be higher than would be the case without bankruptcy costs.
II. The premium for a business risk to be lower than would be the case without bankruptcy costs.
III. The premium for financial risk should rise by less than would be the case without bankruptcy costs.
IV. The premium for financial risk should rise by more than would be the case without bankruptcy costs.Correct
Incorrect
In the case of bankruptcy, a business can expect for the premium for a financial risk to rise by more than would be the case without bankruptcy costs.
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Question 8 of 30
8. Question
What financial intermediary does not transform the nature of the underlying financial securities?
I. Mutual funds.
II. Pension funds.
III. Commercial bank.
IV. Investment banks.Correct
Incorrect
A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, and none of of the variants presented does not transform the nature of the financial securities.
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Question 9 of 30
9. Question
What do major corporate finance decisions include?
Correct
Incorrect
Corporate finance manages short-term financial decisions that affect operations such as investments, financing and dividend decisions.
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Question 10 of 30
10. Question
Which of the following responsibilities does not usually belong to the controller?
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Incorrect
A financial controller is responsible for ensuring that all accounting allocations are appropriately made and documented but credit management is not one of its responsibilities.
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Question 11 of 30
11. Question
What is the correct definition of inflation?
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Incorrect
Inflation is the rate a price rises, and essentially how much the currency is worth at a given moment with regards to purchasing.
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Question 12 of 30
12. Question
Which is the best way to start the budgeting process?
I. Curbing your spending on incidental items such as dining out or entertainment.
II. Automatically deposit money into a savings account with each paycheck.
III. Pay your credit card balance(s) in full each month.
IV. Start tracking all of the money you spend for a period of time, usually a month, so that you have an understanding of where your money goes.Correct
Incorrect
The budgeting process involves planning for future profitability so tracking all the money spend for a period of time, usually, a month gives a good understanding of where the money goes.
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Question 13 of 30
13. Question
How would you define discretionary income?
Correct
Incorrect
Discretionary income is the amount that remains after taxes and fixed expenses such as food, shelter, and clothing.
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Question 14 of 30
14. Question
Suppose you have $100 in a savings account earning 2% interest a year. After five years, how much would you have?
Correct
Incorrect
The initial investment will grow by 2% each year. That means you’ll also earn 2% on the interest you’ve previously earned. After one year, you’ll have $102; after five years, your investment will be worth slightly more than $110.
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Question 15 of 30
15. Question
The traditional approach towards the valuation of a company assumes that:
I. That management can decrease the total value of the firm through the judicious use of financial leverage.
II. That management can both increase and decrease the total value of the firm through the judicious use of financial leverage.
III. That management can lower the total value of the firm through the judicious use of financial leverage.
IV. That management can increase the total value of the firm through the judicious use of financial leverage.Correct
Incorrect
The traditional approach to valuation of leverage assumes that there is an optimal capital structure and that the firm can increase the total value of the firm through the judicious use of leverage.
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Question 16 of 30
16. Question
Usually, when a company is making investment decisions, what do they consider to be important?
Correct
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Most of the time behind the decisions of a company making an investment is how much money they will make after a certain period of time established by the board of shareholders.
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Question 17 of 30
17. Question
How do you define the Future Value (FV)?
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Future value is the value of an asset at a specific date and allow us to calculate the unknown number of time periods of compound interest (n).
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Question 18 of 30
18. Question
You invest $787 today in an account that will return an annual interest rate of 12% with interest compounded monthly. How many years will it take for the $787 investment to have a future value of $1,000?
Correct
Incorrect
If i = 1% (given in the FV of 1 Table, the FV factor that is closest to 1.270). In this case, considering the factor = 1.270, which is located in the row where n = 24.
Since n = 24 this is dividing the 24 months by 12 months in a year in order to get the answer in years. It will take approximately 2 years for your $787 investment to reach a future value of $1,000.
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Question 19 of 30
19. Question
How long does it take to double an investment of $7000, if the investment pays only simple interest at the rate of 10% per year?
Correct
Incorrect
The formula for calculating this is: FV = PV * (1+r)^t where,
t = Years
r = Discount Rate
PV = Present ValueUsing the variables provided, the formula becomes as follows:
(2*$7,000) = $7,000 * (1+.10)^t
$14,000 = $7,000 * (1.10)^t $2 = 1.10^tUsing a financial calculator it results in the following:
$.6931 = .0953t
t = 7.2725 years -
Question 20 of 30
20. Question
To what does the required rate of return is related to?
Correct
Incorrect
The required rate of return is the minimum return an investor will accept for owning a company’s stock.
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Question 21 of 30
21. Question
Which of the following are true when you think about a stakeholder?
I. A stakeholder is any entity that has an interest in a business or project.
II. A stakeholder is any person that has an interest in a business or project.
III. A stakeholder is any person that has invested in a business or project.
IV. A stakeholder is any creditor that has an interest in a business or project.Correct
Incorrect
Stakeholders can have a significant impact on decisions regarding the operations and finances of an organization. Examples of stakeholders are investors, creditors, employees, and even the local community.
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Question 22 of 30
22. Question
What are the disadvantages of having a partnership?
I. Difficult to transfer ownership.
II. Unlimited liability.
III. Partnership dissolves when one partner dies or wishes to sell.
IV. Relatively easy to start.Correct
Incorrect
There are several disadvantages of a partnership. Some of them include the difficulty to transfer ownership, unlimited liability and that the partnership dissolves when one partner dies or wishes to sell.
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Question 23 of 30
23. Question
What can be considered a true statement regarding working capital?
Correct
Incorrect
Working capital is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities.
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Question 24 of 30
24. Question
If your assets increased by $5,000 and your liabilities decreased by $3,000, what your net worth would be?
Correct
Incorrect
$5,000 – (-$3,000) = $5,000 + $3,000 = $8,000.
The net worth would increase by $8,000.
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Question 25 of 30
25. Question
What is the difference between a primary market versus a secondary market?
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Incorrect
In the primary market, the investor can purchase shares directly from the company. In Secondary Market, investors buy and sell the stocks and bonds among themselves.
In the primary market, security can be sold only once, whereas in the secondary market it can be done an infinite number of times.
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Question 26 of 30
26. Question
Which of the following statements from below is true when it comes to capital budgeting?
Correct
Incorrect
Capital budgeting is the process a business undertakes to evaluate potential major projects or long-term investments.
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Question 27 of 30
27. Question
What is the capital structure?
I. The mixture of credit and debit maintained by the firm.
II. The mixture of debt and equity maintained by the firm.
III. The mixture of credit maintained by the firm.
IV. The mixture of credit and equity maintained by the firm.Correct
Incorrect
The capital structure is a particular combination of debt and equity used by a company to finance its overall operations and growth.
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Question 28 of 30
28. Question
Which of the following would be consistent with a more aggressive approach to financing working capital?
I. Financing short-term needs with short-term funds.
II. Financing permanent inventory buildup with long-term debt.
III. Financing seasonal needs with short-term funds.
IV. Financing some long-term needs with short-term fundsCorrect
Incorrect
The aggressive approach is a high-risk strategy of working capital financing wherein short-term finances are utilized not only to finance the temporary working capital but also a reasonable part of the permanent working capital.
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Question 29 of 30
29. Question
How would you define the analytical process of valuation?
Correct
Incorrect
Based on variables perceived valuation is the estimation of an asset’s value that is related to future investment returns.
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Question 30 of 30
30. Question
How would you define free cash flow?
I. Money in the bank is what every company strives to achieve.
II. Money in the bank that the company already has as a deposit.
III. The money that the company has into their account.
IV. The amount of money taken from the bank as a credit for the company.Correct
Incorrect
Free cash flow is the amount of cash left over after the company has paid all its expenses and capital expenditures.