MEM Financial Management for Engineers 2

Question 1

What is the primary purpose of a pro forma financial statement?

Accepted Answer

To project future financial performance

Answer

To record historical transactions accurately

Answer

To comply with SEC reporting requirements

Answer

To calculate current tax obligations

Question 2

Which capital structure theory suggests that an optimal debt-equity mix minimizes WACC and maximizes firm value?

Accepted Answer

Trade-off theory

Answer

Modigliani-Miller theorem (no taxes)

Answer

Pecking order theory

Answer

Market timing theory

Question 3

An engineering manager evaluates two projects with identical NPVs. Project A has a 2-year payback; Project B has a 5-year payback. Which is generally preferred?

Accepted Answer

Project A, because shorter payback reduces risk and improves liquidity

Answer

Project B, because longer payback indicates more revenue

Answer

Neither, because NPV is the only relevant metric

Answer

Project B, because more time allows for better returns

Question 4

What does a positive EVA (Economic Value Added) indicate?

Accepted Answer

The company is creating shareholder value above its cost of capital

Answer

The company has positive net income

Answer

The company has more assets than liabilities

Answer

The company's stock price is rising

Question 5

In financial analysis, what does 'sensitivity analysis' examine?

Accepted Answer

How changes in key assumptions affect project outcomes

Answer

How employee morale affects financial results

Answer

The sensitivity of customers to price changes only

Answer

How regulatory changes impact audit results

Question 6

Which depreciation method results in higher depreciation expense in early years of an asset's life?

Accepted Answer

Double declining balance depreciation

Answer

Straight-line depreciation

Answer

Units of production depreciation

Answer

Sum-of-years digits (both B and D)