CPFM General Practice Test 2 — Questions and Answers
Question 1: Under the time value of money, which value answers 'how much is a future cash flow worth today'?
- Present value (Correct answer)
- Future value
- Terminal value
- Book value
Correct answer: Present value
Present value discounts a future cash flow back to today using a discount rate.
Question 2: A bond's coupon rate is 5% and the market yield is 7%. The bond will most likely trade at a:
- Discount (Correct answer)
- Premium
- Par
- Negative price
Correct answer: Discount
When market yield exceeds the coupon rate, the bond sells below par at a discount.
Question 3: Which ratio measures a company's ability to pay short-term obligations with its most liquid assets, excluding inventory?
- Quick ratio (Correct answer)
- Current ratio
- Debt-to-equity
- Gross margin
Correct answer: Quick ratio
The quick (acid-test) ratio excludes inventory from current assets.
Question 4: What does a positive net present value (NPV) on a project indicate?
- The project adds value and should be accepted (Correct answer)
- The project should be rejected
- The project breaks even exactly
- The discount rate is negative
Correct answer: The project adds value and should be accepted
A positive NPV means returns exceed the required rate, adding shareholder value.
Question 5: Diversification primarily reduces which type of risk in a portfolio?
- Unsystematic risk (Correct answer)
- Systematic risk
- Inflation risk
- Interest rate risk
Correct answer: Unsystematic risk
Diversification reduces firm-specific (unsystematic) risk but not market-wide risk.
Question 6: In the DuPont analysis, return on equity (ROE) is decomposed into net profit margin, asset turnover, and:
- Equity multiplier (Correct answer)
- Current ratio
- Dividend yield
- Beta
Correct answer: Equity multiplier
The equity multiplier captures financial leverage in the DuPont breakdown.
Question 7: Which financial statement reports a company's cash inflows and outflows over a period?
- Statement of cash flows (Correct answer)
- Balance sheet
- Income statement
- Statement of retained earnings
Correct answer: Statement of cash flows
The statement of cash flows tracks operating, investing, and financing cash movements.
CPFM General Practice Test 2
Under the time value of money, which value answers 'how much is a future cash flow worth today'?