MBA Finance 2 — Questions and Answers
Question 1: What is 'beta' in the Capital Asset Pricing Model (CAPM)?
- The risk-free rate of return
- A measure of a stock's volatility relative to the market (Correct answer)
- The expected market return
- The firm's dividend yield
Correct answer: A measure of a stock's volatility relative to the market
Beta measures the sensitivity of a security's returns to market movements, indicating its systematic (non-diversifiable) risk.
Question 2: Which type of analysis compares a company's financial ratios to industry averages?
- Trend Analysis
- Vertical Analysis
- Benchmarking Analysis (Correct answer)
- Horizontal Analysis
Correct answer: Benchmarking Analysis
Benchmarking (or cross-sectional) analysis compares a firm's ratios against industry peers or competitors to assess relative performance.
Question 3: What is 'free cash flow' primarily used to measure?
- Total revenue generated
- Cash available after capital expenditures for distribution to stakeholders (Correct answer)
- Operating expenses incurred
- Book value of assets
Correct answer: Cash available after capital expenditures for distribution to stakeholders
Free Cash Flow (FCF) measures the cash a company generates after spending on capital expenditures needed to maintain or expand its asset base.
Question 4: What does a high Price-to-Earnings (P/E) ratio typically indicate?
- The stock is undervalued
- Investors expect high future growth from the company (Correct answer)
- The company has low profitability
- The dividend payout is high
Correct answer: Investors expect high future growth from the company
A high P/E ratio generally signals that investors are willing to pay a premium because they expect strong future earnings growth.
Question 5: In bond valuation, what happens to bond prices when market interest rates rise?
- Bond prices rise proportionally
- Bond prices remain unchanged
- Bond prices fall (Correct answer)
- Bond prices become unpredictable
Correct answer: Bond prices fall
Bond prices and interest rates have an inverse relationship — when rates rise, existing bonds with lower fixed coupons become less attractive, so their prices fall.
Question 6: What is the purpose of a pro forma financial statement?
- To report historical audit results
- To project future financial performance based on assumptions (Correct answer)
- To satisfy regulatory filing requirements
- To calculate current tax obligations
Correct answer: To project future financial performance based on assumptions
Pro forma statements are forward-looking projections that model anticipated financial outcomes based on specific assumptions and business plans.
MBA Finance 2
What is 'beta' in the Capital Asset Pricing Model (CAPM)?