CFM CFM Corporate Finance & Valuation 1

Question 1

The Weighted Average Cost of Capital (WACC) is used as the discount rate when:

Accepted Answer

Discounting a firm's expected free cash flows to determine enterprise value

Answer

WACC represents the blended cost of all capital sources and is used as the discount rate in discounted cash flow (DCF) analysis to determine enterprise value.

Question 2

Which capital budgeting method calculates the discount rate at which NPV equals zero?

Accepted Answer

Internal Rate of Return (IRR)

Answer

IRR is the discount rate that makes the NPV of a project's cash flows equal to zero; if IRR exceeds the cost of capital, the project adds value.

Question 3

What does the Modigliani-Miller theorem suggest about capital structure in a world without taxes?

Accepted Answer

Capital structure is irrelevant and does not affect firm value

Answer

M&M Proposition I states that in perfect markets without taxes, firm value is unaffected by capital structure because investors can replicate any leverage ratio themselves.

Question 4

Enterprise Value (EV) is calculated as:

Accepted Answer

Market capitalization + Debt - Cash

Answer

EV = Market Cap + Total Debt - Cash and equivalents, representing the total cost to acquire a business including assumption of debt net of available cash.

Question 5

What is the primary advantage of using the Payback Period method for capital budgeting?

Accepted Answer

It is simple, easy to calculate, and emphasizes liquidity and speed of recovery

Answer

The payback period is straightforward to calculate and highlights how quickly an investment recovers its cost, making it useful for liquidity-constrained firms.

CFM - Certified Finance Manager Practice Test

CFM - Certified Finance Manager Practice Test

CFM CFM Corporate Finance & Valuation 1