B. Acy Bachelor of Accountancy Corporate Finance and Financial Management 1 — Questions and Answers
Question 1: Which of the following best describes the primary goal of financial management in a corporation?
- Maximizing total revenues
- Maximizing shareholder wealth (Correct answer)
- Minimizing total costs
- Maximizing net income
Correct answer: Maximizing shareholder wealth
The primary goal of financial management is to maximize shareholder wealth, which is reflected in the market value of the firm's stock.
Question 2: A firm has EBIT of $500,000, interest expense of $80,000, and a tax rate of 25%. What is the firm's net income?
- $315,000 (Correct answer)
- $375,000
- $420,000
- $500,000
Correct answer: $315,000
EBT = $500,000 - $80,000 = $420,000; Net income = $420,000 × (1 - 0.25) = $315,000.
Question 3: Which capital budgeting method considers the time value of money and measures the dollar value added to a project?
- Payback period
- Accounting rate of return
- Net present value (NPV) (Correct answer)
- Profitability index
Correct answer: Net present value (NPV)
NPV discounts all cash flows at the required rate of return and measures the dollar amount of value created (positive NPV) or destroyed (negative NPV).
Question 4: The weighted average cost of capital (WACC) is used to:
- Determine the optimal dividend payout ratio
- Discount future cash flows to evaluate investment projects (Correct answer)
- Calculate the firm's debt-to-equity ratio
- Measure the firm's liquidity position
Correct answer: Discount future cash flows to evaluate investment projects
WACC represents the blended cost of all capital sources and serves as the discount rate for evaluating investment projects in capital budgeting.
Question 5: If a bond has a face value of $1,000, a coupon rate of 6%, and is currently trading at $950, its current yield is approximately:
- 6.0%
- 6.3% (Correct answer)
- 5.7%
- 7.0%
Correct answer: 6.3%
Current yield = Annual coupon / Market price = ($1,000 × 6%) / $950 = $60 / $950 ≈ 6.3%.
Question 6: Which of the following is NOT a component of the operating cycle?
- Days sales outstanding
- Days inventory outstanding
- Days payable outstanding
- Cash conversion cycle (Correct answer)
Correct answer: Cash conversion cycle
The cash conversion cycle is derived from operating cycle components (DSO + DIO - DPO); it is the net result, not a component itself.
Question 7: Under the Capital Asset Pricing Model (CAPM), a stock with a beta greater than 1.0 is considered:
- Less volatile than the market
- More volatile than the market (Correct answer)
- Risk-free
- Negatively correlated with the market
Correct answer: More volatile than the market
A beta greater than 1.0 indicates the stock moves more than proportionally to market movements, making it more volatile than the overall market.
B. Acy Bachelor of Accountancy Corporate Finance and Financial Management 1
Which of the following best describes the primary goal of financial management in a corporation?