BMO Financial Management 3

Question 1

The weighted average cost of capital (WACC) is used in financial management primarily to:

Accepted Answer

Serve as the discount rate for evaluating new investments

Answer

WACC represents the minimum return a company must earn on its investments to satisfy all capital providers, and is used as the hurdle rate in NPV analysis.

Question 2

Which financial statement reports retained earnings?

Accepted Answer

Balance sheet

Answer

Retained earnings appear in the stockholders' equity section of the balance sheet, representing cumulative net income not distributed as dividends.

Question 3

A project has an NPV of -$50,000. A business manager should:

Accepted Answer

Reject the project because it destroys value

Answer

A negative NPV means the project returns less than the required rate of return, destroying shareholder value, so it should be rejected.

Question 4

Operating leverage refers to the degree to which a firm uses:

Accepted Answer

Fixed costs in its cost structure

Answer

Operating leverage measures the sensitivity of operating income to sales changes, driven by the proportion of fixed versus variable costs.

Question 5

Which of the following is a source of long-term financing for a corporation?

Accepted Answer

Corporate bonds

Answer

Corporate bonds are long-term debt instruments typically maturing in 10–30 years, making them a primary source of long-term capital.

(BMO) Business Management Officer Certification Practice Test

(BMO) Business Management Officer Certification Practice Test

BMO Financial Management 3