CCA CCA Corporate Finance & Capital Structure

Question 1

What is the Weighted Average Cost of Capital (WACC) used for in corporate finance?

Accepted Answer

As a discount rate to evaluate investment projects and determine firm value

Answer

To calculate dividend payments to shareholders

Answer

To measure liquidity ratios

Answer

To set credit terms for customers

Question 2

According to the Modigliani-Miller theorem (with taxes), what happens to firm value as debt increases?

Accepted Answer

Firm value increases due to the tax shield on interest

Answer

Firm value decreases due to financial risk

Answer

Firm value is unaffected by capital structure

Answer

Firm value decreases due to higher WACC

Question 3

Which capital budgeting method accounts for the time value of money AND expresses the return as a percentage?

Accepted Answer

Internal rate of return (IRR)

Answer

Payback period

Answer

Accounting rate of return (ARR)

Answer

Net present value (NPV)

Question 4

A project has a positive NPV. What does this indicate?

Accepted Answer

The project creates value by earning more than the required rate of return

Answer

The project's payback period is less than one year

Answer

The project earns exactly the required rate of return

Answer

The project has no financial risk

Question 5

What is financial leverage, and what is its primary effect on earnings?

Accepted Answer

Using debt financing to amplify returns; it magnifies both gains and losses

Answer

Using equity financing to amplify returns; it stabilizes earnings

Answer

Using retained earnings to fund operations; it reduces volatility

Answer

Hedging currency risk; it protects earnings

Question 6

Which of the following best describes the pecking order theory of capital structure?

Accepted Answer

Firms prefer internal financing first, then debt, and issue equity only as a last resort

Answer

Firms target an optimal debt-to-equity ratio and adjust toward it over time

Answer

Firms always choose the capital source with the lowest after-tax cost

Answer

Firms balance tax benefits of debt against bankruptcy costs