CGA CGA Corporate Finance & Capital Markets 2

Question 1

What does the term 'systematic risk' refer to in portfolio theory?

Accepted Answer

Risk inherent to the entire market that cannot be diversified away

Answer

Systematic risk (market risk) affects all securities and cannot be reduced through diversification, unlike unsystematic risk.

Question 2

A company's beta is 1.4. If the market return is 10% and the risk-free rate is 3%, what is the required return using CAPM?

Accepted Answer

12.8%

Answer

CAPM: Required return = 3% + 1.4 × (10% − 3%) = 3% + 9.8% = 12.8%.

Question 3

Which of the following is an example of an unsecured short-term debt instrument issued by corporations?

Accepted Answer

Commercial paper

Answer

Commercial paper is a short-term, unsecured promissory note issued by corporations to fund short-term liabilities.

Question 4

What is the primary purpose of a sinking fund provision in a bond indenture?

Accepted Answer

To allow the issuer to repurchase bonds gradually before maturity

Answer

A sinking fund requires the issuer to set aside funds periodically to retire portions of the bond issue before maturity, reducing default risk.

Question 5

Which valuation model values a stock based on the present value of expected future dividends growing at a constant rate?

Accepted Answer

Gordon Growth Model

Answer

The Gordon Growth Model (dividend discount model) values stock as D1 ÷ (r − g), where dividends grow at a constant rate g.

(CGA) Certified General Accountant Practice Test