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Financial Management and Capital Budgeting Flashcards

6 cards from real BEC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 6 Financial Management and Capital Budgeting flashcards as text

  1. Which of the following best describes a capital lease (finance lease)?

    Answer: A lease that transfers substantially all risks and rewards of ownership to the lessee

    A finance lease (capital lease) transfers substantially all the risks and rewards of ownership to the lessee, requiring capitalization on the balance sheet as an asset and liability.

  2. The optimal capital structure for a firm minimizes its:

    Answer: Weighted average cost of capital (WACC)

    The optimal capital structure is the debt-to-equity mix that minimizes the firm's WACC, thereby maximizing the value of the firm and shareholder wealth.

  3. A company's current ratio is 1.8 and its quick ratio is 0.9. This difference most likely indicates:

    Answer: The company holds a significant amount of inventory

    The gap between the current ratio and quick ratio arises because the quick ratio excludes inventory; a large difference signals that inventory is a major component of current assets.

  4. Which capital budgeting technique explicitly accounts for the time value of money?

    Answer: Net Present Value (NPV)

    NPV discounts all future cash flows to their present value using the cost of capital, making it the technique that most rigorously incorporates the time value of money.

  5. A dividend payout ratio measures:

    Answer: The percentage of earnings paid to shareholders as dividends

    The dividend payout ratio is calculated as dividends per share divided by earnings per share, expressing the fraction of net income distributed to shareholders.

  6. Free cash flow (FCF) is best described as:

    Answer: Operating cash flow minus capital expenditures

    FCF represents the cash generated by operations after funding capital expenditures needed to maintain or grow the asset base, available to service debt and equity holders.