BEC Financial Management and Capital Budgeting 1

Question 1

The weighted average cost of capital (WACC) represents:

Accepted Answer

The average rate a company must earn to satisfy all capital providers

Answer

WACC is the blended required rate of return weighted by the proportions of debt and equity in the capital structure, representing the minimum return the firm must earn on its assets.

Question 2

Net Present Value (NPV) of a project is calculated as:

Accepted Answer

Present value of future cash inflows minus the initial investment

Answer

NPV equals the sum of discounted future cash inflows less the initial investment; a positive NPV indicates the project creates shareholder value.

Question 3

A company's Internal Rate of Return (IRR) decision rule states: accept a project if:

Accepted Answer

IRR exceeds the required rate of return (hurdle rate)

Answer

The IRR decision rule holds that a project should be accepted when its IRR exceeds the company's required rate of return, indicating the project earns more than its cost of capital.

Question 4

Working capital is defined as:

Accepted Answer

Current assets minus current liabilities

Answer

Working capital is the difference between current assets and current liabilities, measuring a company's short-term liquidity and operational efficiency.

Question 5

The payback period method evaluates a project based on:

Accepted Answer

How long it takes to recover the initial investment from cash flows

Answer

The payback period measures the time required for a project's cumulative cash inflows to equal its initial cost, favoring projects that recoup investment quickly.

BEC - Business Environment and Concepts Practice Test

BEC - Business Environment and Concepts Practice Test

BEC Financial Management and Capital Budgeting 1