IFA IFA Financial Analysis & Decision Making 2

Question 1

What is net present value (NPV) used for in financial decision making?

Accepted Answer

Determining whether an investment creates value by discounting future cash flows

Answer

Calculating the book value of assets

Answer

Measuring a company's current profitability

Answer

Calculating tax liabilities on investments

Question 2

The internal rate of return (IRR) is the discount rate at which:

Accepted Answer

Net present value equals zero

Answer

Net profit equals zero

Answer

The project payback period is maximized

Answer

Return on equity equals cost of debt

Question 3

What does a high debt-to-equity ratio indicate about a company's capital structure?

Accepted Answer

The company relies heavily on debt financing, increasing financial risk

Answer

The company is primarily equity-financed and low risk

Answer

The company has no outstanding loans

Answer

The company is highly liquid

Question 4

Which financial statement shows changes in a company's cash position over a period?

Accepted Answer

Statement of cash flows

Answer

Income statement

Answer

Balance sheet

Answer

Statement of changes in equity

Question 5

What is a payback period and what is its main limitation?

Accepted Answer

Time to recover initial investment from cash flows; ignores time value of money and post-payback flows

Answer

Time to double profits; ignores taxation

Answer

Time until dividends are paid; too simple to calculate

Answer

Time until break-even sales; ignores fixed costs

Question 6

Vertical analysis of an income statement expresses each line item as a percentage of:

Accepted Answer

Revenue (net sales)

Answer

Total assets

Answer

Net income

Answer

Total liabilities