B. Acy Bachelor of Accountancy Corporate Finance and Financial Management 2

Question 1

Which of the following represents the Modigliani-Miller proposition in a world with no taxes?

Accepted Answer

A firm's value is independent of its capital structure

Answer

A firm's value increases as it adds more debt

Answer

Equity financing is always cheaper than debt financing

Answer

Dividends increase firm value

Question 2

A company has the following data: Sales = $2,000,000; Variable costs = $1,200,000; Fixed costs = $400,000. What is the contribution margin ratio?

Accepted Answer

40%

Answer

60%

Answer

30%

Answer

70%

Question 3

Which type of lease requires the lessee to recognize both an asset and a liability on the balance sheet?

Accepted Answer

Finance (capital) lease

Answer

Operating lease under old GAAP only

Answer

Short-term lease

Answer

Month-to-month lease

Question 4

The internal rate of return (IRR) rule states that a project should be accepted when:

Accepted Answer

IRR exceeds the required rate of return (hurdle rate)

Answer

IRR is less than the cost of capital

Answer

IRR equals the payback period

Answer

IRR is negative

Question 5

Which ratio measures a company's ability to meet short-term obligations using only its most liquid assets (excluding inventory)?

Accepted Answer

Quick (acid-test) ratio

Answer

Current ratio

Answer

Cash ratio

Answer

Debt-to-equity ratio

Question 6

Financial leverage amplifies which of the following for common shareholders?

Accepted Answer

Both gains and losses

Answer

Only gains, never losses

Answer

Only losses, never gains

Answer

Operating risk only

Question 7

A firm repurchasing its own shares in the open market will most likely cause which of the following?

Accepted Answer

Earnings per share (EPS) to increase

Answer

Earnings per share (EPS) to decrease

Answer

Return on equity (ROE) to decrease

Answer

Total assets to increase