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Corporate Finance & Governance Flashcards

7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Corporate Finance & Governance flashcards as text

  1. A company's WACC is 10% and it is evaluating a project with an IRR of 12%. According to the NPV rule, the firm should:

    Answer: Accept the project because IRR exceeds WACC

    When a project's IRR exceeds the WACC (cost of capital), the project has a positive NPV and should be accepted.

  2. Which of the following best describes the agency problem in corporate governance?

    Answer: Conflicts between managers and shareholders due to misaligned interests

    The agency problem arises when managers (agents) act in their own self-interest rather than in the best interest of shareholders (principals).

  3. A firm has net income of $500,000, depreciation of $100,000, and a decrease in net working capital of $50,000. What is the firm's approximate operating cash flow?

    Answer: $650,000

    Operating cash flow = Net income + Depreciation + Decrease in NWC = $500,000 + $100,000 + $50,000 = $650,000.

  4. Which capital structure theory suggests that firms have an optimal debt ratio that balances tax benefits of debt against financial distress costs?

    Answer: Static Trade-Off Theory

    The Static Trade-Off Theory holds that the optimal capital structure balances the tax shield benefit of debt against the costs of financial distress.

  5. Which of the following is a primary duty of the board of directors?

    Answer: Overseeing management and protecting shareholder interests

    The board of directors is responsible for overseeing management and acting as a fiduciary to protect the interests of shareholders.

  6. A project requires an initial investment of $1,000,000 and generates annual after-tax cash flows of $250,000 for 6 years. The payback period is:

    Answer: 4.0 years

    Payback period = Initial investment / Annual cash flow = $1,000,000 / $250,000 = 4 years.

  7. Under the Modigliani-Miller proposition with corporate taxes, the value of a levered firm equals:

    Answer: The value of an unlevered firm plus the present value of the tax shield

    With corporate taxes, MM shows that the value of a levered firm = unlevered firm value + PV of tax shield, since interest is tax-deductible.