CGA CGA Corporate Finance & Capital Markets 1

Question 1

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

Accepted Answer

Internal Rate of Return

Answer

The Internal Rate of Return (IRR) is the discount rate that makes the net present value of all cash flows equal to zero.

Question 2

A company has a debt-to-equity ratio of 1.5. If total equity is $400,000, what is total debt?

Accepted Answer

$600,000

Answer

Total debt = debt-to-equity ratio × equity = 1.5 × $400,000 = $600,000.

Question 3

Which of the following best describes the weighted average cost of capital (WACC)?

Accepted Answer

The blended cost of all financing sources weighted by their proportion

Answer

WACC blends the cost of debt and equity, each weighted by its proportion in the total capital structure.

Question 4

A bond is trading at a premium. Which statement is correct?

Accepted Answer

The coupon rate exceeds the market rate

Answer

A bond trades at a premium when its coupon rate is higher than the prevailing market interest rate, making it more valuable.

Question 5

Under the Modigliani-Miller theorem (no taxes), how does capital structure affect firm value?

Accepted Answer

Capital structure has no effect on firm value

Answer

In a perfect market without taxes, Modigliani-Miller showed that capital structure is irrelevant to total firm value.

(CGA) Certified General Accountant Practice Test