CA Corporate Finance & Investment 2

Question 1

A firm's weighted average cost of capital (WACC) is best described as:

Accepted Answer

The minimum return a firm must earn to satisfy all capital providers

Answer

WACC represents the blended required return across all capital sources, weighted by their proportions in the capital structure.

Question 2

Under the Modigliani-Miller theorem with taxes, a firm's value increases as it takes on more debt because:

Accepted Answer

Interest payments shield income from corporate taxes

Answer

The tax shield on interest payments increases firm value by reducing the effective cost of debt financing.

Question 3

Which capital budgeting technique explicitly accounts for the time value of money AND provides a dollar-amount measure of value created?

Accepted Answer

Net present value (NPV)

Answer

NPV discounts all cash flows at the required rate and shows the absolute dollar amount of value added above the investment cost.

Question 4

A project has an IRR of 14% and the firm's WACC is 11%. Which statement is correct?

Accepted Answer

The project should be accepted because IRR exceeds WACC

Answer

When IRR exceeds the cost of capital (WACC), the project generates returns above the hurdle rate and should be accepted.

Question 5

The Capital Asset Pricing Model (CAPM) states that the expected return on a security equals:

Accepted Answer

Risk-free rate + Beta × (Market return − Risk-free rate)

Answer

CAPM: E(R) = Rf + β(Rm − Rf), where the equity risk premium is scaled by beta to reflect systematic risk.

(CA) Chartered Certified Accountant Practice Test