FA Capital Markets and Investment Analysis 1

Question 1

What is the primary market in securities?

Accepted Answer

A market where companies issue new securities directly to investors

Answer

The primary market is where companies raise capital by issuing new securities (IPOs, secondary offerings) directly to investors for the first time.

Question 2

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 proportions

Answer

WACC combines the cost of equity and cost of debt, weighted by their respective proportions in the capital structure, representing the minimum return a company must earn.

Question 3

What does NPV stand for in capital investment analysis?

Accepted Answer

Net Present Value

Answer

Net Present Value (NPV) discounts all future cash flows of an investment to the present using a required rate of return to determine if the investment adds value.

Question 4

An investment with a positive NPV indicates:

Accepted Answer

The investment is expected to add value beyond the required rate of return

Answer

A positive NPV means the project's discounted future cash flows exceed the initial investment, indicating value creation above the cost of capital.

Question 5

What does the Internal Rate of Return (IRR) represent?

Accepted Answer

The discount rate that makes the NPV of an investment equal to zero

Answer

IRR is the discount rate at which the present value of future cash flows equals the initial investment, effectively the break-even rate of return.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Capital Markets and Investment Analysis 1