MBA Finance 1 — Questions and Answers
Question 1: What does the Weighted Average Cost of Capital (WACC) represent?
- The average interest rate on all debt
- The blended cost of a firm's equity and debt financing weighted by their proportions (Correct answer)
- The return required by equity shareholders only
- The cost of issuing new shares
Correct answer: The blended cost of a firm's equity and debt financing weighted by their proportions
WACC blends the cost of equity and debt proportionally to reflect the overall required return for the firm's capital structure.
Question 2: Which financial statement shows a company's revenues and expenses over a period of time?
- Balance Sheet
- Statement of Cash Flows
- Income Statement (Correct answer)
- Statement of Retained Earnings
Correct answer: Income Statement
The Income Statement (Profit & Loss Statement) reports revenues, costs, and expenses to show net income or loss over a specific period.
Question 3: What is the Net Present Value (NPV) rule for capital budgeting decisions?
- Accept projects with NPV less than zero
- Accept projects with NPV equal to zero
- Accept projects with NPV greater than zero (Correct answer)
- Accept projects with the lowest NPV
Correct answer: Accept projects with NPV greater than zero
A positive NPV indicates that a project generates more value than its cost, so it should be accepted to maximize shareholder wealth.
Question 4: Which ratio measures a company's ability to meet short-term obligations using its most liquid assets?
- Debt-to-Equity Ratio
- Current Ratio
- Quick Ratio (Correct answer)
- Return on Assets
Correct answer: Quick Ratio
The Quick Ratio excludes inventory from current assets, providing a stricter measure of short-term liquidity than the Current Ratio.
Question 5: What is the primary goal of financial management in a publicly traded corporation?
- Maximize total revenues
- Minimize total costs
- Maximize shareholder wealth (Correct answer)
- Maximize employee compensation
Correct answer: Maximize shareholder wealth
The primary goal of financial management is to maximize shareholder wealth, typically measured by the market value of the firm's stock.
Question 6: In capital structure theory, what does the Modigliani-Miller theorem suggest in a world without taxes?
- Firms should use maximum debt financing
- Capital structure is irrelevant to firm value (Correct answer)
- Equity financing is always cheaper than debt
- Dividends determine firm value
Correct answer: Capital structure is irrelevant to firm value
Modigliani-Miller's theorem states that under perfect markets with no taxes, firm value is unaffected by its capital structure.
MBA Finance 1
What does the Weighted Average Cost of Capital (WACC) represent?