#1
What is the primary goal of financial management in a corporation?
Maximizing shareholder wealth
ExplanationThe ultimate aim of financial management is to increase the value of shareholders' equity.
#2
Which of the following is NOT a component of the time value of money?
Risk premium
ExplanationWhile risk is an important factor, risk premium is not directly a component of time value of money calculations.
#3
Which of the following represents a measure of a company's profitability?
ROE
ExplanationReturn on Equity (ROE) indicates how efficiently a company is using shareholders' equity to generate profit.
#4
What does the P/E ratio (Price-to-Earnings ratio) indicate about a company?
The company's market valuation relative to its earnings
ExplanationP/E ratio assesses the market price of a company's stock relative to its earnings per share.
#5
Which financial statement reports a company's revenues and expenses over a specific period?
Income statement
ExplanationIncome statement provides a summary of a company's financial performance during a given period, showing revenues and expenses.
#6
Which of the following is a measure of a company's liquidity?
Current ratio
ExplanationCurrent ratio assesses a company's ability to pay its short-term liabilities with its short-term assets.
#7
What is the formula to calculate the present value of a future cash flow?
PV = FV / (1 + r)^n
ExplanationPresent value (PV) represents the current worth of a future sum of money discounted at a given rate (r) over a period of time (n).
#8
Which of the following is a measure of a stock's volatility relative to the market?
Beta
ExplanationBeta measures how much a stock's returns move in relation to the market returns; it reflects the stock's systematic risk.
#9
What is the formula for calculating the Weighted Average Cost of Capital (WACC)?
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
ExplanationWACC represents the average rate of return a company is expected to pay to all its security holders.
#10
What is the formula for calculating the dividend growth model (DGM) or Gordon Growth Model (GGM)?
P0 = D0 / (r - g)
ExplanationDGM/GGM estimates the fair value of a stock based on the present value of expected future dividends, assuming constant growth.
#11
What does the term 'capital budgeting' refer to in corporate finance?
The process of managing a company's long-term investments
ExplanationCapital budgeting involves evaluating and selecting long-term investment projects to allocate capital resources efficiently.
#12
What is the purpose of financial leverage?
To increase a company's profitability
ExplanationFinancial leverage aims to magnify returns to equity holders by using borrowed funds, potentially increasing profitability.
#13
What does the Capital Asset Pricing Model (CAPM) measure?
The cost of equity
ExplanationCAPM calculates the expected return on equity, considering risk-free rate, market risk premium, and beta.
#14
What is the formula for calculating the Cost of Equity (Re) using the Capital Asset Pricing Model (CAPM)?
Re = Rf + (Beta * (Rm - Rf))
ExplanationCAPM-based cost of equity considers risk-free rate, market risk premium, and beta to estimate the return expected by equity investors.
#15
What is the purpose of the Modigliani-Miller theorem in corporate finance?
To determine the optimal capital structure of a company
ExplanationModigliani-Miller theorem establishes conditions under which financial leverage does not affect a firm's value, aiding in capital structure decisions.
#16
What is the formula for calculating the Weighted Average Beta of a portfolio?
WB = (w1 * β1) + (w2 * β2) + ... + (wn * βn)
ExplanationWeighted Average Beta accounts for each asset's beta and its proportion in the portfolio, reflecting overall portfolio risk.