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

Pro forma financial statements are forward-looking projections used for planning, fundraising, or evaluating the financial impact of decisions.

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

The trade-off theory holds that firms balance the tax benefits of debt against the costs of financial distress to find an optimal capital structure.

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

Shorter payback periods reduce exposure to uncertainty and improve cash flow availability, making Project A preferable when NPVs are equal.

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

Positive EVA means a firm earns returns exceeding its cost of capital, indicating true economic profit and value creation for shareholders.

Question 5

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

Accepted Answer

How changes in key assumptions affect project outcomes

Answer

Sensitivity analysis tests how much a project's NPV or other metrics change when individual input variables (like sales volume or cost) are varied.

MEM - Master of Engineering Management Practice Test

MEM - Master of Engineering Management Practice Test

MEM Financial Management for Engineers 2