FIA Corporate Finance Fundamentals 4 — Questions and Answers
Question 1: Which working capital strategy involves maintaining low inventory and tight credit terms to minimize current assets?
- Conservative strategy
- Aggressive strategy (Correct answer)
- Matching strategy
- Hedging strategy
Correct answer: Aggressive strategy
An aggressive working capital strategy minimizes current assets (lean inventory, strict receivables) to reduce financing costs, accepting higher liquidity risk.
Question 2: A firm issues 10,000 shares of stock at $15 per share with a par value of $1 per share. What amount is credited to the additional paid-in capital (APIC) account?
- $10,000
- $140,000 (Correct answer)
- $150,000
- $15,000
Correct answer: $140,000
APIC = (Issue price - Par value) × Shares = ($15 - $1) × 10,000 = $140,000.
Question 3: Which of the following is an example of a synergy in a merger and acquisition?
- Increased regulatory compliance costs
- Combined entity achieving lower per-unit production costs (Correct answer)
- Separation of management and ownership
- Increased dividend payments to shareholders
Correct answer: Combined entity achieving lower per-unit production costs
Cost synergies such as economies of scale that lower per-unit production costs are a primary rationale for M&A transactions.
Question 4: If a company's cash conversion cycle (CCC) decreases, this generally indicates:
- The company is taking longer to collect receivables
- The company is holding inventory for a longer period
- The company is managing working capital more efficiently (Correct answer)
- The company's accounts payable period has shortened
Correct answer: The company is managing working capital more efficiently
A shorter CCC means the company converts investments in inventory and receivables to cash more quickly, reflecting better working capital efficiency.
Question 5: Under which dividend policy does a company maintain a constant payout ratio regardless of earnings fluctuations?
- Stable dollar dividend policy
- Residual dividend policy
- Constant payout ratio policy (Correct answer)
- Low-regular-plus-extra policy
Correct answer: Constant payout ratio policy
A constant payout ratio policy sets dividends as a fixed percentage of earnings, so dividends fluctuate in line with profits.
Question 6: A company's enterprise value is $5 million and it has $1 million in debt and $500,000 in cash. What is the implied equity value?
- $3.5 million
- $4 million
- $4.5 million (Correct answer)
- $5.5 million
Correct answer: $4.5 million
Equity Value = Enterprise Value - Debt + Cash = $5M - $1M + $0.5M = $4.5 million.
Question 7: Which of the following best describes the concept of economic value added (EVA)?
- Total revenue minus total expenses
- Net operating profit after tax minus the cost of capital employed (Correct answer)
- Earnings before interest and taxes
- Market capitalization minus book value of equity
Correct answer: Net operating profit after tax minus the cost of capital employed
EVA = NOPAT - (WACC × Invested Capital), measuring economic profit after accounting for all capital costs.
FIA Corporate Finance Fundamentals 4
Which working capital strategy involves maintaining low inventory and tight credit terms to minimize current assets?