BBM Financial Management 2

Question 1

What does IRR stand for in capital budgeting?

Accepted Answer

Internal Rate of Return

Answer

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?

Accepted Answer

Quick Ratio

Answer

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?

Accepted Answer

Using borrowed funds to increase potential return on investment

Answer

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?

Accepted Answer

Cost of goods sold

Answer

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?

Accepted Answer

The allocation of an asset's cost over its useful life

Answer

Depreciation systematically allocates the cost of a tangible fixed asset over its expected useful life to match expense with revenue.

BBM - Business Management Degree Practice Test