FIA Corporate Finance Fundamentals 5

Question 1

Which of the following scenarios would most likely lead to financial distress?

Accepted Answer

High fixed debt obligations with declining revenues

Answer

Financial distress typically arises when a firm's cash flows are insufficient to meet its fixed debt obligations, especially if revenues decline.

Question 2

A project has an NPV of $0 when discounted at 12%. This means the project's IRR is:

Accepted Answer

Equal to 12%

Answer

By definition, the IRR is the discount rate at which NPV equals zero, so if NPV = $0 at 12%, then IRR = 12%.

Question 3

In the context of capital budgeting, what does the profitability index (PI) measure?

Accepted Answer

Present value of future cash flows per dollar of initial investment

Answer

PI = PV of future cash flows ÷ Initial investment, indicating value created per dollar invested and useful for ranking projects under capital rationing.

Question 4

A rights offering allows existing shareholders to:

Accepted Answer

Purchase additional shares at a discount before the public offering

Answer

A rights offering gives current shareholders the right to buy new shares at a below-market subscription price, helping them maintain their ownership percentage.

Question 5

Which of the following best explains why the weighted average cost of capital (WACC) is used as the discount rate in DCF analysis?

Accepted Answer

It reflects the blended required return of all capital providers

Answer

WACC weights the cost of each capital component (debt and equity) by its proportion in the firm's capital structure, representing the minimum return required by all investors.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Corporate Finance Fundamentals 5