Corporate Finance & Investment Flashcards

A company uses an overdraft to fund a short-term cash shortfall. Which type of financing is this?

Answer: Short-term debt financing

A bank overdraft is a form of short-term debt that provides flexible funding for temporary cash flow gaps.

In a discounted cash flow analysis, what is the 'terminal value' (residual value) used for?

Answer: To capture the value of all cash flows beyond the explicit forecast period

Terminal value estimates the present value of all cash flows occurring after the detailed forecast horizon, often using a perpetuity formula.

Which ratio directly measures the efficiency with which a company converts its investment in assets into revenue?

Answer: Asset turnover ratio

Asset turnover = Revenue / Total Assets; it measures how effectively assets are used to generate sales.

A company with high operating leverage will experience which of the following?

Answer: Greater sensitivity of profits to changes in sales volume

High operating leverage (high fixed costs relative to variable costs) magnifies the impact of revenue changes on operating profit.

What is the key advantage of using the Modified Internal Rate of Return (MIRR) over the standard IRR?

Answer: MIRR eliminates the problem of multiple IRRs by assuming reinvestment at the cost of capital

MIRR resolves the multiple IRR problem and uses a more realistic reinvestment rate assumption (the WACC) rather than the IRR itself.

A company announces a share buyback program. What is the most likely effect on Earnings Per Share (EPS)?

Answer: EPS increases because the same earnings are spread over fewer shares

Repurchasing shares reduces the number of shares outstanding, so if net earnings remain the same, EPS increases.

Which of the following is NOT a method of returning value to shareholders?

Answer: Issuing new shares to the public

Issuing new shares raises capital for the company and dilutes existing shareholders — it does not return value to them.