Free CFM Investment & Capital Management Questions and Answers

Question 1

What is capital budgeting?

Accepted Answer

Evaluating long-term investments

Answer

Capital budgeting is the process of evaluating potential large expenditures or investments that have long-term implications for a business. It involves analyzing projects such as purchasing new equipment, expanding facilities, or developing new products. The goal is to decide which projects will yield the most value and enhance shareholder wealth over an extended period.

Question 2

What is the cost of capital?

Accepted Answer

Required investment return

Answer

The cost of capital represents the minimum rate of return that a company must earn on an investment project to maintain its market value and satisfy its investors. It is essentially the weighted average cost of all sources of financing, including debt and equity. This metric is fundamental for capital budgeting decisions, as projects must generate returns exceeding the cost of capital to be considered financially viable.

Question 3

What is diversification in investment?

Accepted Answer

Spreading investments to reduce risk

Answer

Diversification in investment is a strategy that involves spreading investments across various assets, industries, and geographical regions. The primary goal is to reduce overall portfolio risk by ensuring that a poor performance in one investment does not severely impact the entire portfolio. By not putting all eggs in one basket, investors can mitigate specific risks and potentially achieve more stable returns.

Question 4

What is the internal rate of return (IRR)?

Accepted Answer

Discount rate with NPV zero

Answer

The Internal Rate of Return (IRR) is a capital budgeting metric used to estimate the profitability of potential investments. It is defined as the discount rate at which the Net Present Value (NPV) of all cash flows from a project equals zero. Projects with an IRR higher than the company's cost of capital are generally considered acceptable, indicating a potentially profitable investment.

Question 5

What is equity financing?

Accepted Answer

Selling company shares

Answer

Equity financing involves raising capital by selling ownership stakes in a company, typically in the form of shares, to investors. Unlike debt financing, it does not require repayment of borrowed money or interest payments. Instead, investors become shareholders and share in the company's profits and potential growth, aligning their interests with the company's success.

CFM - Certified Finance Manager Practice Test

CFM - Certified Finance Manager Practice Test

Free CFM Investment & Capital Management Questions and Answers