CA Financial Management 5

Question 1

Which of the following scenarios would most likely trigger a firm to issue equity rather than debt?

Accepted Answer

The firm's debt ratio is already near its industry maximum

Answer

When a firm's leverage is near the ceiling of its target or industry norm, issuing additional debt increases financial risk and borrowing costs, making equity the preferred choice.

Question 2

Which type of risk CANNOT be eliminated through diversification?

Accepted Answer

Systematic risk

Answer

Systematic risk (market risk) affects all securities and cannot be diversified away; only unsystematic (firm-specific) risk is eliminated through portfolio diversification.

Question 3

A firm uses the 'percentage of sales' method for financial forecasting. If sales are projected to grow from $1M to $1.2M and accounts receivable are currently $100,000 (10% of sales), projected accounts receivable will be:

Accepted Answer

$120,000

Answer

Accounts receivable remain at 10% of sales; 10% × $1,200,000 = $120,000.

Question 4

Which of the following is an advantage of leasing over purchasing an asset outright?

Accepted Answer

Leasing typically requires a smaller initial cash outlay

Answer

Leasing conserves cash by avoiding a large upfront purchase price, which is especially valuable for firms with limited capital or uncertain long-term needs for the asset.

Question 5

In a net present value (NPV) analysis, if the NPV of a project is exactly zero, the firm should:

Accepted Answer

Accept the project because it exactly earns the required return

Answer

An NPV of zero means the project returns exactly the required rate of return (WACC), making it acceptable — it neither creates nor destroys value.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Management 5