BEC Financial Management and Capital Budgeting 2

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

The optimal capital structure for a firm minimizes its:

Accepted Answer

Weighted average cost of capital (WACC)

Answer

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.

Question 3

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

Accepted Answer

The company holds a significant amount of inventory

Answer

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.

Question 4

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

Accepted Answer

Net Present Value (NPV)

Answer

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.

Question 5

A dividend payout ratio measures:

Accepted Answer

The percentage of earnings paid to shareholders as dividends

Answer

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

BEC - Business Environment and Concepts Practice Test

BEC - Business Environment and Concepts Practice Test

BEC Financial Management and Capital Budgeting 2