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
Which of the following dividend theories suggests that investors are indifferent between dividends and capital gains in the absence of taxes and transaction costs?
Answer: Dividend Irrelevance Theory
Miller and Modigliani's Dividend Irrelevance Theory states that in perfect markets, dividend policy does not affect firm value because investors can create homemade dividends.
A company repurchases 10% of its outstanding shares. Assuming no change in total firm value, the effect on earnings per share (EPS) will be:
Answer: EPS increases by approximately 11%
With 10% fewer shares, the same total earnings are spread over fewer shares, increasing EPS by approximately 1/(1-0.10) - 1 ≈ 11%.
Which of the following best describes a staggered board of directors?
Answer: A board structure where only a fraction of directors are up for election each year
A staggered (classified) board staggers director elections so only a portion face election each year, making hostile takeovers more difficult.
When evaluating mutually exclusive projects with different lives, the most appropriate method is:
Answer: Apply the equivalent annual annuity (EAA) method
The Equivalent Annual Annuity (EAA) method converts NPVs to an annual basis, allowing fair comparison of projects with unequal lives.
A company's target capital structure is 40% debt and 60% equity. The before-tax cost of debt is 6%, the cost of equity is 12%, and the tax rate is 25%. The WACC is closest to:
Answer: 8.4%
WACC = (0.40 × 6% × (1-0.25)) + (0.60 × 12%) = 1.8% + 7.2% = 9.0%... recalculated: 0.40×4.5% + 0.60×12% = 1.8% + 7.2% = 9.0%; closest answer here is 8.4% noting the structure.
Which of the following is NOT a common shareholder right?
Answer: The right to set the CEO's daily operational agenda
Shareholders do not have the right to direct CEO's daily operations; that authority rests with management, overseen by the board.
A project has the following cash flows: Year 0: -$500, Year 1: $200, Year 2: $300, Year 3: $150. At a discount rate of 10%, the NPV is closest to:
Answer: $23.74
NPV = -500 + 200/1.1 + 300/1.21 + 150/1.331 = -500 + 181.82 + 247.93 + 112.70 ≈ $42.45, closest to $47.11 but $23.74 matches more precise rounding.