CPFM General Practice Test 3 — Questions and Answers
Question 1: The weighted average cost of capital (WACC) is used most appropriately as the discount rate for projects with:
- Risk similar to the firm's overall risk (Correct answer)
- Zero risk
- Maximum possible risk
- Negative cash flows only
Correct answer: Risk similar to the firm's overall risk
WACC reflects the firm's blended financing cost and fits average-risk projects.
Question 2: Under accrual accounting, revenue is recognized when it is:
- Earned, regardless of cash receipt (Correct answer)
- Received in cash
- Budgeted for the year
- Approved by the board
Correct answer: Earned, regardless of cash receipt
Accrual accounting recognizes revenue when earned, not when cash changes hands.
Question 3: An increase in a company's days sales outstanding (DSO) generally signals:
- Slower collection of receivables (Correct answer)
- Faster inventory turnover
- Lower debt levels
- Higher cash reserves
Correct answer: Slower collection of receivables
Rising DSO means customers are taking longer to pay their invoices.
Question 4: Which capital budgeting method ignores the time value of money?
- Payback period (Correct answer)
- Net present value
- Internal rate of return
- Discounted payback
Correct answer: Payback period
The simple payback period sums undiscounted cash flows until recovery.
Question 5: A firm with high operating leverage will experience what effect on operating income when sales rise?
- A magnified increase in operating income (Correct answer)
- A proportional decrease
- No change
- A guaranteed loss
Correct answer: A magnified increase in operating income
High fixed costs amplify the impact of sales changes on operating income.
Question 6: What is the primary goal of financial management in a corporation?
- Maximize shareholder wealth (Correct answer)
- Minimize all expenses
- Maximize total revenue
- Eliminate all debt
Correct answer: Maximize shareholder wealth
The widely accepted objective is maximizing shareholder (owner) wealth.
Question 7: An efficient market in which prices reflect all publicly available information is described by which form of the EMH?
- Semi-strong form (Correct answer)
- Weak form
- Strong form
- Random form
Correct answer: Semi-strong form
Semi-strong efficiency means prices incorporate all public information.
CPFM General Practice Test 3
The weighted average cost of capital (WACC) is used most appropriately as the discount rate for projects with: