CGA CGA Corporate Finance & Capital Markets 3

Question 1

Which of the following best describes financial leverage?

Accepted Answer

Using borrowed funds to amplify potential returns on equity

Answer

Using equity to fund operations exclusively

Answer

Minimizing total debt to reduce financial risk

Answer

Issuing preferred stock to reduce dilution

Question 2

The degree of operating leverage (DOL) measures sensitivity of EBIT to changes in:

Accepted Answer

Sales revenue

Answer

Interest expense

Answer

Net income

Answer

Tax rates

Question 3

Which ratio measures how efficiently a company generates sales from its assets?

Accepted Answer

Asset turnover ratio

Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Gross profit margin

Question 4

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

Accepted Answer

Accept if NPV is positive

Answer

Accept if NPV is negative

Answer

Accept if NPV equals zero

Answer

Accept only if NPV exceeds IRR

Question 5

Which of the following describes a leveraged buyout (LBO)?

Accepted Answer

Acquiring a company using mostly debt, secured by target assets

Answer

Acquiring a company using primarily equity financing

Answer

Issuing new shares to fund an acquisition

Answer

Merging two firms to form a joint venture

Question 6

Duration is a measure used in bond analysis to assess:

Accepted Answer

Sensitivity of bond price to interest rate changes

Answer

Credit quality of the issuer

Answer

Likelihood of early redemption

Answer

Coupon payment frequency