CFA Corporate Finance & Governance 2

Question 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:

Accepted Answer

Accept the project because IRR exceeds WACC

Answer

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

Question 2

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

Accepted Answer

Conflicts between managers and shareholders due to misaligned interests

Answer

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

Question 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?

Accepted Answer

$650,000

Answer

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

Question 4

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

Accepted Answer

Static Trade-Off Theory

Answer

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

Question 5

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

Accepted Answer

Overseeing management and protecting shareholder interests

Answer

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

CFA Practice Test

CFA Practice Test

CFA Corporate Finance & Governance 2