CFM Corporate Finance & Valuation 2

Question 1

What is the net present value (NPV) decision rule for capital projects?

Accepted Answer

Accept if NPV is positive; reject if NPV is negative

Answer

A positive NPV indicates a project creates value by generating returns exceeding the cost of capital, so it should be accepted.

Question 2

When comparing NPV and IRR, which method is theoretically superior for evaluating mutually exclusive projects?

Accepted Answer

NPV, because it measures absolute value creation in dollars

Answer

NPV is theoretically superior for mutually exclusive projects because it directly measures dollar value added, while IRR can give misleading rankings when project scales differ.

Question 3

What is the Modigliani-Miller theorem (without taxes) about capital structure?

Accepted Answer

In perfect markets, a firm's value is independent of its capital structure

Answer

M&M Proposition I (without taxes) states that in a perfect market, capital structure is irrelevant — firm value depends only on its operating cash flows.

Question 4

What is a leveraged buyout (LBO)?

Accepted Answer

A purchase of a company funded mostly with debt, using the target's assets as collateral

Answer

An LBO uses significant debt to fund the acquisition, with the acquired company's cash flows and assets servicing and securing the debt.

Question 5

What does 'dilution' mean in the context of an acquisition using stock as currency?

Accepted Answer

The acquirer's earnings per share decrease after issuing new shares for the deal

Answer

Dilution occurs when an acquirer issues new shares to fund an acquisition, increasing share count and potentially decreasing earnings per share for existing shareholders.

CFM - Certified Finance Manager Practice Test

CFM - Certified Finance Manager Practice Test

CFM Corporate Finance & Valuation 2