Corporate Finance & Investment Flashcards
7 cards from real CA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Corporate Finance & Investment flashcards as text
When two mutually exclusive projects have conflicting NPV and IRR rankings, which method should be used for the accept/reject decision?
Answer: NPV, because it directly measures value added in dollar terms
NPV is preferred in conflict situations because it correctly measures the absolute increase in shareholder wealth, whereas IRR can give misleading rankings.
Economic Value Added (EVA) is defined as:
Answer: Net operating profit after tax (NOPAT) minus a capital charge equal to invested capital × WACC
EVA = NOPAT − (Invested Capital × WACC); it measures whether the firm's returns exceed the true cost of all capital employed.
Which of the following would most likely increase a firm's equity beta?
Answer: Increasing the firm's financial leverage (debt-to-equity ratio)
Higher financial leverage increases the variability of equity returns because fixed interest payments must be met before equity holders participate in earnings, raising equity beta.
A callable bond gives the issuer the right to redeem the bond early. Compared to an otherwise identical non-callable bond, the callable bond will trade at:
Answer: A lower price because the call option benefits the issuer at the investor's expense
Investors require a higher yield (lower price) on callable bonds to compensate for the reinvestment risk and the call option the issuer holds.
In project finance, 'non-recourse debt' means:
Answer: Lenders' claims are limited to the project's own assets and cash flows
Non-recourse financing ring-fences lenders to the special purpose vehicle's assets only, protecting the sponsor's balance sheet from project default.
Duration of a bond measures:
Answer: The weighted average time to receive all cash flows, used to estimate price sensitivity to interest rate changes
Duration (Macaulay duration) is the present-value-weighted average timing of cash flows; modified duration approximates the percentage price change for a 1% rate move.
The free cash flow to equity (FCFE) is best calculated as:
Answer: Net income + Depreciation − ΔWorking Capital − Capex + Net borrowing
FCFE starts from net income, adds non-cash charges, adjusts for working capital and capex, and includes net debt raised, representing cash available to equity holders.