BBM Financial Management 2 — Questions and Answers
Question 1: What does IRR stand for in capital budgeting?
- Initial Rate of Return
- Internal Rate of Return (Correct answer)
- Incremental Rate of Revenue
- Integrated Revenue Ratio
Correct answer: Internal Rate of Return
IRR (Internal Rate of Return) is the discount rate at which an investment's NPV equals zero, used to evaluate project profitability.
Question 2: Which ratio measures a company's ability to meet short-term obligations using its most liquid assets?
- Current Ratio
- Quick Ratio (Correct answer)
- Debt Ratio
- Asset Turnover
Correct answer: Quick Ratio
The quick ratio (acid-test ratio) excludes inventory from current assets, giving a stricter measure of immediate liquidity.
Question 3: What is the concept of 'leverage' in financial management?
- Using equity exclusively to finance assets
- Using borrowed funds to increase potential return on investment (Correct answer)
- Selling assets to raise capital
- Distributing profits to shareholders
Correct answer: Using borrowed funds to increase potential return on investment
Financial leverage refers to using debt financing to amplify potential returns on equity investment, though it also increases financial risk.
Question 4: Which of the following is NOT a component of the cost of capital?
- Cost of debt
- Cost of equity
- Cost of retained earnings
- Cost of goods sold (Correct answer)
Correct answer: Cost of goods sold
Cost of capital includes the cost of debt, equity, and retained earnings; cost of goods sold is an operating expense, not a capital cost.
Question 5: What does 'depreciation' represent in financial accounting?
- An increase in asset value over time
- A cash expense paid annually
- The allocation of an asset's cost over its useful life (Correct answer)
- A method to increase reported profits
Correct answer: The allocation of an asset's cost over its useful life
Depreciation systematically allocates the cost of a tangible fixed asset over its expected useful life to match expense with revenue.
Question 6: Which financial strategy involves a company buying back its own shares?
- Stock split
- Rights issue
- Share repurchase (Correct answer)
- Dividend reinvestment
Correct answer: Share repurchase
A share repurchase (buyback) occurs when a company purchases its own outstanding shares, often to return value to shareholders or improve EPS.
BBM Financial Management 2
What does IRR stand for in capital budgeting?