FIA Corporate Finance Fundamentals 2

Question 1

A company has EBIT of $500,000, interest expense of $50,000, and a tax rate of 30%. What is the net income?

Accepted Answer

$315,000

Answer

Net income = (EBIT - Interest) × (1 - Tax rate) = ($500,000 - $50,000) × 0.70 = $315,000.

Question 2

Which capital structure theory argues that taxes and bankruptcy costs create an optimal debt level?

Accepted Answer

Trade-Off Theory

Answer

Trade-Off Theory holds that firms balance the tax shield of debt against rising financial distress costs to find an optimal capital structure.

Question 3

A project requires an initial investment of $200,000 and generates annual cash flows of $50,000 for 6 years. What is the payback period?

Accepted Answer

4 years

Answer

Payback period = Initial investment ÷ Annual cash flow = $200,000 ÷ $50,000 = 4 years.

Question 4

Which of the following best describes the concept of operating leverage?

Accepted Answer

The sensitivity of EBIT to changes in sales revenue

Answer

Operating leverage measures how a given change in sales amplifies changes in EBIT, driven by fixed versus variable cost structure.

Question 5

A firm's stock currently pays a dividend of $2.00 and dividends are expected to grow at 5% per year. If the required return is 10%, what is the stock's intrinsic value?

Accepted Answer

$42.00

Answer

Gordon Growth Model: P = D1 ÷ (r - g) = ($2.00 × 1.05) ÷ (0.10 - 0.05) = $2.10 ÷ 0.05 = $42.00.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Corporate Finance Fundamentals 2