Bcom Bachelor of Commerce Corporate Finance & Financial Management 1 — Questions and Answers
Question 1: What is the primary goal of financial management in a corporation?
- Maximizing profit in the short term
- Maximizing shareholder wealth (Correct answer)
- Minimizing operating costs
- Maximizing total sales revenue
Correct answer: Maximizing shareholder wealth
The primary goal is to maximize shareholder wealth (market value of equity), which accounts for risk, timing, and long-term value rather than just short-term profits.
Question 2: Which of the following is NOT a core function of financial management?
- Investment decisions
- Financing decisions
- Production scheduling decisions (Correct answer)
- Dividend decisions
Correct answer: Production scheduling decisions
Production scheduling is an operations management function; financial management covers investment, financing, and dividend decisions.
Question 3: The time value of money concept states that:
- Money today is worth less than the same amount in the future
- Money today is worth more than the same amount in the future (Correct answer)
- Money has equal value regardless of when it is received
- Money value depends solely on inflation rates
Correct answer: Money today is worth more than the same amount in the future
A dollar today is worth more than a dollar in the future because it can be invested now to earn returns.
Question 4: Net Present Value (NPV) of a project is calculated as:
- Total revenues minus total costs over the project life
- Present value of cash inflows minus present value of cash outflows (Correct answer)
- Future value of inflows minus future value of outflows
- Total cash inflows divided by the initial investment
Correct answer: Present value of cash inflows minus present value of cash outflows
NPV = PV of cash inflows − PV of cash outflows, discounted at the required rate of return; a positive NPV indicates value creation.
Question 5: The Internal Rate of Return (IRR) is best defined as:
- The minimum acceptable rate of return set by management
- The discount rate at which the NPV of a project equals zero (Correct answer)
- The average accounting return on the initial investment
- The rate at which the company borrows from banks
Correct answer: The discount rate at which the NPV of a project equals zero
IRR is the specific discount rate that makes the NPV of all project cash flows equal exactly zero.
Question 6: A key limitation of the Payback Period method of capital budgeting is that it:
- Accounts for the time value of money
- Ignores all cash flows occurring after the payback period (Correct answer)
- Is too complex to apply in practice
- Always produces the same ranking as the NPV method
Correct answer: Ignores all cash flows occurring after the payback period
The payback period ignores all cash flows that occur after the initial investment is recovered, potentially misranking long-lived projects.
Question 7: Opportunity cost in financial decision-making refers to:
- The interest expense on borrowed capital
- The return foregone by choosing one investment over the next best alternative (Correct answer)
- The cost incurred due to production inefficiency
- The tax penalty on suboptimal investment choices
Correct answer: The return foregone by choosing one investment over the next best alternative
Opportunity cost is the benefit given up when one alternative is selected over the next best option available.
Bcom Bachelor of Commerce Corporate Finance & Financial Management 1
What is the primary goal of financial management in a corporation?