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

A positive NPV means the project is expected to generate returns exceeding the cost of capital, thereby creating value for shareholders.

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

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.

Question 3

Financial leverage in corporate finance refers to:

Accepted Answer

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

Answer

Financial leverage involves using borrowed capital to increase the potential return on equity, but it also amplifies losses, thereby increasing financial risk.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

Payback Period

Answer

The payback period simply totals undiscounted cash flows until the initial investment is recovered, completely ignoring the time value of money.

(CAA) Certified Actuarial Analyst Practice Test

(CAA) Certified Actuarial Analyst Practice Test

CAA Business Finance & Economics 2