CA Financial Management 4

Question 1

Under the Capital Asset Pricing Model (CAPM), the expected return of a stock with a beta of 1.5, a risk-free rate of 3%, and a market return of 9% is:

Accepted Answer

12.0%

Answer

E(R) = Rf + β × (Rm − Rf) = 3% + 1.5 × (9% − 3%) = 3% + 9% = 12%.

Question 2

A company repurchases its own shares. Which of the following is the most likely immediate balance sheet effect?

Accepted Answer

Total assets decrease and stockholders' equity decreases

Answer

A buyback uses cash (reducing assets) and increases treasury stock (a contra-equity account), reducing stockholders' equity by the same amount.

Question 3

Which of the following is the primary goal of financial management for a publicly traded corporation?

Accepted Answer

Maximizing the market value of shareholders' wealth

Answer

The primary goal of financial management is to maximize shareholder wealth, reflected in the market price of the firm's stock, which accounts for risk and time value of money.

Question 4

An investor holds a portfolio with a beta of 0.8. If the market drops 10%, what is the expected portfolio return based on beta alone?

Accepted Answer

−8%

Answer

A beta of 0.8 means the portfolio moves 80% as much as the market; a −10% market move implies a −8% portfolio move.

Question 5

The 'pecking order theory' of capital structure suggests that firms prefer financing in which order?

Accepted Answer

Retained earnings → debt → equity

Answer

Pecking order theory (Myers & Majluf) holds that firms prefer internal financing first (retained earnings), then debt, and finally new equity to minimize information asymmetry costs.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Management 4