FAC Corporate Finance & Investment 5

Question 1

Which of the following is a key assumption of the Capital Asset Pricing Model (CAPM) that is often criticized as unrealistic?

Accepted Answer

Risk-free borrowing and lending at the same rate is available to all investors

Answer

CAPM assumes investors can borrow and lend unlimited amounts at the same risk-free rate, a condition that does not hold in practice.

Question 2

A firm is considering a merger financed entirely with stock. Which condition would make the acquisition LEAST dilutive to existing shareholders?

Accepted Answer

The acquirer's P/E is higher than the target's P/E

Answer

When the acquirer's P/E exceeds the target's, fewer shares are issued per dollar of target earnings acquired, making the deal accretive or less dilutive.

Question 3

Which type of risk is eliminated through portfolio diversification?

Accepted Answer

Unsystematic (idiosyncratic) risk

Answer

Unsystematic risk is company-specific and diversifiable; systematic (market) risk affects all securities and cannot be eliminated through diversification.

Question 4

A spin-off differs from a carve-out primarily because:

Accepted Answer

A spin-off distributes subsidiary shares to existing shareholders with no cash proceeds to the parent

Answer

In a spin-off, the parent distributes subsidiary shares pro-rata to existing shareholders and receives no cash; a carve-out involves a partial IPO that raises cash for the parent.

Question 5

Sensitivity analysis in capital budgeting primarily helps managers:

Accepted Answer

Determine which single input variable most impacts project NPV

Answer

Sensitivity analysis changes one variable at a time while holding others constant to identify which assumptions most affect the project's value.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Corporate Finance & Investment 5