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

NPV discounts all expected future cash flows of a project to their present value and subtracts the initial investment to determine if the project creates net value.

Question 2

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

Accepted Answer

Net present value equals zero

Answer

The IRR is the discount rate that makes the net present value of all cash flows from a project equal to zero, representing the project's effective yield.

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

A high debt-to-equity ratio indicates that a company has financed a large portion of its assets with debt, which increases interest obligations and financial risk.

Question 4

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

Accepted Answer

Statement of cash flows

Answer

The statement of cash flows categorizes cash movements into operating, investing, and financing activities to explain changes in the cash balance.

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

The payback period measures how long it takes to recoup an investment, but it ignores the time value of money and any cash flows occurring after the payback point.

(IFA) Institute of Financial Accountants Certification Practice Test

(IFA) Institute of Financial Accountants Certification Practice Test

IFA IFA Financial Analysis & Decision Making 2