B. Acy Bachelor of Accountancy Corporate Finance and Financial Management 3

Question 1

Which of the following dividend theories argues that investors are indifferent between dividends and capital gains in a perfect market?

Accepted Answer

Modigliani-Miller dividend irrelevance theory

Answer

MM's dividend irrelevance theory holds that in a perfect market, firm value depends on investment decisions, not on whether earnings are distributed as dividends or retained.

Question 2

The degree of operating leverage (DOL) measures sensitivity of:

Accepted Answer

EBIT to changes in sales

Answer

DOL = % Change in EBIT / % Change in Sales; it measures how much operating income changes for each 1% change in revenues.

Question 3

Which of the following best describes the trade-off theory of capital structure?

Accepted Answer

Firms balance the tax benefits of debt against financial distress costs

Answer

The trade-off theory says the optimal capital structure is found by balancing the present value of tax shields from debt against the present value of financial distress costs.

Question 4

A $10,000 investment grows to $14,693 in 5 years. Using the rule of 72, approximately what annual interest rate was earned?

Accepted Answer

8%

Answer

Using the exact calculation: (14693/10000)^(1/5) - 1 ≈ 8%; Rule of 72 confirms: 72/8 = 9 years to double, and 8% growth over 5 years produces roughly a 46.9% total return.

Question 5

Which of the following is an example of systematic (market) risk that CANNOT be eliminated through diversification?

Accepted Answer

A nationwide recession reducing consumer spending

Answer

A nationwide recession affects all companies in the market, making it systematic (non-diversifiable) risk, unlike company-specific events which can be diversified away.

B. Acy Bachelor of Accountancy Practice Test

B. Acy Bachelor of Accountancy Practice Test

B. Acy Bachelor of Accountancy Corporate Finance and Financial Management 3