Business Finance & Economics Flashcards
7 cards from real CAA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Business Finance & Economics flashcards as text
According to the Net Present Value (NPV) rule, a capital project should be accepted when:
Answer: NPV is positive
A positive NPV means the project is expected to generate returns exceeding the cost of capital, thereby creating value for shareholders.
The Weighted Average Cost of Capital (WACC) represents:
Answer: The average return required by all capital providers, weighted by their proportions in the capital structure
WACC blends the costs of debt and equity, each weighted by their respective share of total capital, and represents the minimum return a firm must earn to satisfy all its capital providers.
Financial leverage in corporate finance refers to:
Answer: Using debt financing to amplify potential returns, while also magnifying potential losses
Financial leverage involves using borrowed capital to increase the potential return on equity, but it also amplifies losses, thereby increasing financial risk.
In the Capital Asset Pricing Model (CAPM), beta (β) measures:
Answer: A security's sensitivity to systematic (market-wide) risk
Beta measures the degree to which a security's returns move in relation to the overall market; a beta greater than 1 indicates higher volatility than the market.
Which capital budgeting method fails to account for the time value of money?
Answer: Payback Period
The payback period simply totals undiscounted cash flows until the initial investment is recovered, completely ignoring the time value of money.
The Gordon Growth Model (Dividend Discount Model) values a stock as:
Answer: The present value of all expected future dividends
The DDM values a stock by discounting all expected future dividends at the investor's required rate of return, treating dividends as the fundamental cash flows to equity holders.
Systematic risk in a portfolio context is best described as:
Answer: Market-wide risk that cannot be eliminated through diversification
Systematic risk, also called market risk, affects the entire economy or market and cannot be diversified away; only unsystematic (firm-specific) risk can be reduced through diversification.