CA Financial Management 3

Question 1

Which of the following best describes 'financial risk' in the context of a firm's capital structure?

Accepted Answer

Additional risk borne by equity holders due to the use of debt financing

Answer

Financial risk is the additional variability in equity returns that arises because fixed interest obligations must be met before equity holders receive any return.

Question 2

A project costs $500,000 and generates net cash inflows of $125,000 per year. What is the payback period?

Accepted Answer

4 years

Answer

Payback period = Initial investment / Annual cash inflow = $500,000 / $125,000 = 4 years.

Question 3

Which of the following working capital strategies is considered the MOST aggressive?

Accepted Answer

Financing permanent current assets with short-term debt

Answer

Financing permanent (non-seasonal) current assets with short-term debt is aggressive because it exposes the firm to rollover risk and interest rate fluctuations.

Question 4

The Modigliani-Miller theorem, WITHOUT taxes, states that:

Accepted Answer

A firm's value is independent of its capital structure

Answer

In a perfect capital market with no taxes, M&M Proposition I holds that firm value is unaffected by how it is financed.

Question 5

Which ratio directly measures how effectively a firm collects its receivables?

Accepted Answer

Receivables turnover ratio

Answer

Receivables turnover = Net credit sales / Average accounts receivable, showing how many times receivables are collected in a period.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Management 3