CAA Business Finance & Economics 2

Question 1

According to the Net Present Value (NPV) rule, a capital project should be accepted when:

Accepted Answer

NPV is positive

Answer

NPV equals zero exactly

Answer

NPV is negative

Answer

The internal rate of return equals the risk-free rate

Question 2

The Weighted Average Cost of Capital (WACC) represents:

Accepted Answer

The average return required by all capital providers, weighted by their proportions in the capital structure

Answer

The cost of equity financing only

Answer

The risk-free rate plus an equity risk premium

Answer

The after-tax cost of debt financing only

Question 3

Financial leverage in corporate finance refers to:

Accepted Answer

Using debt financing to amplify potential returns, while also magnifying potential losses

Answer

Using equity to conservatively finance all assets

Answer

Diversifying investments across multiple industry sectors

Answer

Hedging against changes in interest rates through derivatives

Question 4

In the Capital Asset Pricing Model (CAPM), beta (β) measures:

Accepted Answer

A security's sensitivity to systematic (market-wide) risk

Answer

The total risk of a security, including all sources

Answer

The unsystematic risk unique to a specific company

Answer

The expected return of the market portfolio itself

Question 5

Which capital budgeting method fails to account for the time value of money?

Accepted Answer

Payback Period

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Modified Internal Rate of Return (MIRR)

Question 6

The Gordon Growth Model (Dividend Discount Model) values a stock as:

Accepted Answer

The present value of all expected future dividends

Answer

The book value of the firm's net assets

Answer

A multiple of the firm's current earnings per share

Answer

The market price-to-earnings ratio multiplied by book value

Question 7

Systematic risk in a portfolio context is best described as:

Accepted Answer

Market-wide risk that cannot be eliminated through diversification

Answer

Risk that can be fully eliminated through diversification

Answer

Company-specific risk arising from internal business decisions

Answer

Risk arising solely from poor management decisions