CA Financial Management 2

Question 1

A company has an after-tax cost of debt of 4% and a cost of equity of 12%. If the capital structure is 40% debt and 60% equity, what is the WACC?

Accepted Answer

8.8%

Answer

WACC = (0.40 × 4%) + (0.60 × 12%) = 1.6% + 7.2% = 8.8%.

Question 2

Which of the following best describes the concept of 'operating leverage'?

Accepted Answer

The sensitivity of operating income to changes in sales volume

Answer

Operating leverage measures how a percentage change in sales affects operating income, driven by fixed vs. variable cost mix.

Question 3

Under the dividend discount model (DDM), if a stock pays a $2 dividend expected to grow at 5% annually and the required return is 9%, what is the stock's intrinsic value?

Accepted Answer

$50.00

Answer

Value = D1 / (r − g) = $2.00 × 1.05 / (0.09 − 0.05) = $2.10 / 0.04 = $52.50 — wait, that is choice D; recalculating: D1 = $2 × 1.05 = $2.10; $2.10/0.04 = $52.50.

Question 4

Which capital budgeting technique accounts for the time value of money AND expresses results as a percentage?

Accepted Answer

Internal rate of return

Answer

IRR is the discount rate that makes NPV equal to zero, expressed as a percentage return that accounts for the time value of money.

Question 5

A firm's current ratio is 2.5 and its quick ratio is 1.0. What does the difference imply?

Accepted Answer

Inventory makes up a large portion of current assets

Answer

The gap between the current ratio and quick ratio indicates that inventory (excluded from the quick ratio) is a large component of current assets.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Management 2