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

Financial leverage involves using debt financing to increase potential returns to equity holders, while also magnifying potential losses.

Question 2

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

Accepted Answer

Sales revenue

Answer

DOL measures how a percentage change in sales affects EBIT, and is driven by the proportion of fixed versus variable costs.

Question 3

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

Accepted Answer

Asset turnover ratio

Answer

The asset turnover ratio (net sales ÷ average total assets) indicates how efficiently management uses assets to generate revenue.

Question 4

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

Accepted Answer

Accept if NPV is positive

Answer

An independent project should be accepted when its NPV is positive, indicating it adds value to the firm.

Question 5

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

Accepted Answer

Acquiring a company using mostly debt, secured by target assets

Answer

In an LBO, a buyer acquires a target company using substantial borrowed funds, with the target's assets typically serving as collateral.

(CGA) Certified General Accountant Practice Test