FIA Corporate Finance Fundamentals 3

Question 1

A company has total assets of $1,000,000, total liabilities of $600,000, and net income of $80,000. What is the return on equity (ROE)?

Accepted Answer

20%

Answer

ROE = Net Income ÷ Shareholders' Equity = $80,000 ÷ ($1,000,000 - $600,000) = $80,000 ÷ $400,000 = 20%.

Question 2

Which of the following is NOT a component of the DuPont analysis of ROE?

Accepted Answer

Dividend payout ratio

Answer

DuPont ROE = Net Profit Margin × Asset Turnover × Equity Multiplier; dividend payout ratio is not a DuPont component.

Question 3

When calculating free cash flow to the firm (FCFF), which item is added back to net income?

Accepted Answer

Depreciation and amortization

Answer

Depreciation and amortization are non-cash charges added back to net income when computing FCFF.

Question 4

A bond with a face value of $1,000 pays a 6% annual coupon and matures in 5 years. If the market yield is 8%, the bond trades at:

Accepted Answer

A discount

Answer

When the market yield exceeds the coupon rate, the bond trades below face value (at a discount).

Question 5

Which of the following best describes agency costs in corporate finance?

Accepted Answer

Costs arising from conflicts of interest between principals and agents

Answer

Agency costs arise from the misalignment of interests between shareholders (principals) and managers (agents), including monitoring and bonding costs.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Corporate Finance Fundamentals 3