MEM Financial Management for Engineers 1 — Questions and Answers
Question 1: Which financial statement shows a company's revenues and expenses over a specific period?
- Balance sheet
- Income statement (Correct answer)
- Cash flow statement
- Statement of retained earnings
Correct answer: Income statement
The income statement (profit and loss statement) reports revenues, expenses, and net income over a defined accounting period.
Question 2: What does WACC stand for in corporate finance?
- Weighted Average Cost of Capital (Correct answer)
- Working Asset Capital Calculation
- Weighted Allocation of Corporate Cost
- Working Average Capital Contribution
Correct answer: Weighted Average Cost of Capital
WACC (Weighted Average Cost of Capital) represents a firm's average cost of financing from all sources, weighted by their proportion in the capital structure.
Question 3: A project has an IRR of 18% and the company's WACC is 12%. What should management do?
- Reject the project because IRR exceeds WACC
- Accept the project because IRR exceeds WACC (Correct answer)
- Reject the project because WACC is too low
- Defer the project until IRR equals WACC
Correct answer: Accept the project because IRR exceeds WACC
When IRR exceeds the cost of capital (WACC), the project generates more return than it costs to finance, so it should be accepted.
Question 4: Which ratio measures a company's ability to meet short-term obligations using its most liquid assets?
- Current ratio
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Return on assets
Correct answer: Quick ratio
The quick ratio (acid-test ratio) excludes inventory from current assets to measure immediate liquidity, providing a stricter test than the current ratio.
Question 5: What is capital budgeting primarily concerned with?
- Managing day-to-day operating expenses
- Evaluating long-term investment decisions (Correct answer)
- Setting employee compensation budgets
- Controlling short-term cash flows
Correct answer: Evaluating long-term investment decisions
Capital budgeting is the process of evaluating and selecting long-term investments in assets or projects that will benefit the firm over multiple years.
Question 6: In the context of MEM financial management, what does 'leverage' refer to?
- Using physical equipment to increase productivity
- Using debt financing to amplify returns on equity (Correct answer)
- Negotiating better supplier contracts
- Increasing workforce headcount
Correct answer: Using debt financing to amplify returns on equity
Financial leverage refers to using borrowed capital (debt) to increase the potential return on equity investment, while also amplifying potential losses.
MEM Financial Management for Engineers 1
Which financial statement shows a company's revenues and expenses over a specific period?