Corporate Finance

The primary goal of the financial manager is to: Maximize accounting profit. Maximize shareholder wealth. Minimize costs. Increase market share.

Which decision involves determining how to raise money?. Capital budgeting. Working capital management. Capital structure. Dividend policy.

Agency problems arise due to conflicts between: Bondholders and regulators. Shareholders and managers. Managers and customers. Auditors and employees.

Which market reflects prices of previously issued securities?. Primary market. Secondary market. Capital market. Money market.

Which of the following is a capital budgeting decision?. Issuing bonds. Paying dividends. Buying new machinery. Managing receivables.

Financial markets exist mainly to: Increase inflation. Allocate capital efficiently. Eliminate uncertainty. Reduce competition.

Which stakeholder typically has residual claim on assets?. Bondholders. Preferred shareholders. Common shareholders. Employees.

A conflict between bondholders and shareholders may arise because shareholders prefer. Low-risk projects. High dividend payouts. High-risk projects. Stable earnings.

Which of the following is NOT a role of financial management?. Investment decisions. Financing decisions. Dividend decisions. Auditing decisions.

In efficient markets: Prices are always rising. Prices fully reflect available information. Insider trading is legal. Investors earn abnormal profits easily.

Which decision affects firm value most directly?. Hiring policy. Capital budgeting. Marketing strategy. Inventory storage.

Which market trades Treasury bills?. Capital market. Money market. Secondary market. Derivatives market.

Which firm type has easiest access to capital markets?. Sole proprietorship. Partnership. Corporation. Cooperative.

Which statement shows a firm’s financial position at a point in time?. Income statement. Cash flow statement. Balance sheet. Statement of retained earnings.

Net working capital equals: A. Current assets – total assets. B. Current assets – current liabilities. C. Total assets – total liabilities. D. Cash – inventory.

Depreciation is best described as: D. Capital expenditure. C. Non-cash expense. B. Tax payment. A. Cash outflow.

Operating cash flow (OCF) equals: A. EBIT + depreciation – taxes. B. Net income + dividends. C. EBIT – interest. D. Revenue – expenses.

Market value differs from book value because market value: C. Reflects current investor expectations. D. Excludes liabilities. B. Reflects historical costs. A. Is based on accounting rules.

Cash flow to creditors equals: A. Interest paid – net new borrowing. B. Net income – dividends. C. EBIT – taxes. D. Cash flow from assets.

Which is a use of cash?. A. Increase in accounts payable. B. Decrease in inventory. C. Capital expenditure. D. Sale of fixed assets.

Cash flow from assets equals: A. Operating CF – capital spending – NWC changes. B. Net income + depreciation. C. EBIT – taxes. D. Dividends + interest.

An increase in inventory results in: A. Cash inflow. B. Cash outflow. C. No cash effect. C. No cash effect.

Which item is NOT a current asset?. A. Inventory. B. Accounts receivable. C. Land. D. Cash.

EBIT stands for: A. Earnings before income tax. B. Earnings before interest and tax. C. Equity before interest and tax. D. Earnings before investment tax.

A firm’s liquidity is best measured by: A. Debt ratio. B. Current ratio. C. ROE. D. Profit margin.

Taxes paid are based on: A. EBIT. B. Net income. C. Taxable income. D. Revenue.

Which is NOT included in cash flow from assets?. A. Operating cash flow. B. Net capital spending. C. Change in NWC. D. Dividends paid.

Retained earnings increase when: A. Dividends exceed net income. B. Net income exceeds dividends. C. Expenses increase. D. Taxes increase.

Which activity affects financing cash flow?. A. Buying inventory. B. Issuing bonds. C. Paying wages. D. Paying taxes.

Non-cash expenses reduce: A. Cash flow. B. Net income. C. EBIT. D. Revenue.

Which liability is long-term?. A. Accounts payable. B. Accrued wages. C. Bonds payable. D. Notes payable (6 months).

The statement of cash flows shows: A. Profitability. B. Liquidity and solvency. C. Market value. D. Shareholder returns.

The current ratio equals: A. Current assets / total assets. B. Current assets / current liabilities. C. Total assets / current liabilities. D. Cash / current liabilities.

The quick ratio excludes: A. Cash. B. Accounts receivable. C. Inventory. D. Marketable securities.

Total asset turnover equals: A. Sales / total assets. B. EBIT / assets. C. Net income / assets. D. Sales / equity.

ROE equals: A. Net income / assets. B. Net income / equity. C. EBIT / equity. D. Sales / equity.

The DuPont identity breaks ROE into: A. Profit margin × asset turnover × equity multiplier. B. ROA × debt ratio. C. EBIT × tax rate. D. Sales × assets.

Higher leverage increases: A. ROA. B. ROE variability. C. Profit margin. D. Liquidity.

The equity multiplier equals: A. Assets / liabilities. B. Assets / equity. C. Equity / assets. D. Debt / equity.

A low inventory turnover indicates: A. Efficient inventory use. B. Excess inventory. C. High demand. D. Strong liquidity.

Market-to-book ratio compares: A. Market price to earnings. B. Market value to book value. C. Sales to assets. D. Equity to debt.

Times interest earned equals: A. EBIT / interest. B. Net income / interest. C. EBIT / debt. D. Sales / interest.

Which ratio measures long-term solvency?. A. Current ratio. B. Debt-equity ratio. C. Inventory turnover. D. Profit margin.

ROA measures: A. Profitability relative to equity. B. Efficiency of asset use. C. Market performance. D. Liquidity.

A higher profit margin indicates: A. Higher costs. B. Lower efficiency. C. Greater profitability per dollar of sales. D. Higher leverage.

Common-size statements express: A. Absolute values. B. Percentages of total. C. Market values. D. Growth rates.

Trend analysis examines: A. Industry averages. B. One-year performance. C. Performance over time. D. Market value changes.

Which ratio is most relevant to creditors?. A. ROE. B. Profit margin. C. Times interest earned. D. Asset turnover.

A firm with high ROE but low ROA likely has: A. Low leverage. B. High leverage. C. Poor profitability. D. Excess liquidity.

Which ratio reflects operating efficiency?. A. Inventory turnover. B. Debt ratio. C. Current ratio. D. P/E ratio.

Financial ratios should be compared with: A. Accounting standards only. B. Industry benchmarks. C. Inflation rates. D. Tax rates.

A major limitation of ratio analysis is: A. Complexity. B. Accounting differences. C. Market efficiency. D. Data availability.

The time value of money implies: A. Money has constant value. B. Money today is worth more than money tomorrow. C. Inflation is irrelevant. D. Interest rates are fixed.

Future value of a lump sum is calculated using: A. PV × (1 – r)ⁿ. B. PV / (1 + r)ⁿ. C. PV × (1 + r)ⁿ. D. PV – r.

Present value discounts future cash flows using: A. Inflation rate. B. Growth rate. C. Discount rate. D. Tax rate.

If you invest Rs.1,000 at 10% for 2 years, FV equals: A. 1,100. B. 1,200. C. 1,210. D. 1,220.

An annuity is: A. A single cash flow. B. Unequal cash flows. C. Equal cash flows over time. D. Growing cash flows.

A perpetuity has: A. Finite life. B. Growing payments. C. Infinite equal payments. D. Declining payments.

Present value of a perpetuity equals: A. C × r. B. C / r. C. C × (1 + r). D. C / (1 + r).

Compounding frequency affects: A. Nominal rate only. B. Effective annual rate. C. Inflation rate. D. Tax rate.

The effective annual rate (EAR) is: A. Always less than nominal rate. B. Equal to nominal rate. C. Always greater than nominal rate (if compounded). D. Independent of compounding.

Discounting converts: A. PV to FV. B. FV to PV. C. Interest to principal. D. Cash to profit.

A growing annuity assumes cash flows: A. Decline at constant rate. B. Grow at constant rate. C. Are irregular. D. Are infinite.

If r = g, PV of growing perpetuity is: A. Zero. B. Infinite. C. Equal to C. D. Undefined.

Doubling period is shortest when: A. Interest rate is low. B. Interest rate is high. C. Inflation is zero. D. Compounding is annual.

Rule of 72 estimates: A. Inflation. B. Time to double investment. C. Interest expense. D. Growth rate.

Discount rate reflects: A. Risk and time preference. B. Inflation only. C. Tax rate. D. Accounting profit.

Which has highest FV?. A. Simple interest. B. Annual compounding. C. Semiannual compounding. D. Continuous compounding.

PV decreases when: A. r decreases. B. n decreases. C. r increases. D. Cash flow increases.

An ordinary annuity assumes payments occur: A. At beginning of period. B. At end of period. C. Continuously. D. Randomly.

An annuity due has payments at: A. End of each period. B. Beginning of each period. C. Mid-period. D. Random times.

Which factor increases PV?. A. Higher discount rate. B. Longer time. C. Lower discount rate. D. Higher risk.

Net Present Value (NPV) equals: A. FV – cost. B. PV of inflows – PV of outflows. C. Accounting profit. D. IRR – cost of capital.

A project should be accepted if: A. NPV < 0. B. NPV = 0. C. NPV > 0. D. IRR < discount rate.

Discounted cash flow analysis considers: A. Accounting profits. B. Time value of money. C. Historical costs. D. Market prices only.

The discount rate reflects: A. Inflation only. B. Opportunity cost of capital. C. Tax rate. D. Growth rate.

NPV measures: A. Accounting return. B. Value added to firm. C. Liquidity. D. Risk.

If cash inflows increase, NPV: A. Decreases. B. Increases. C. Remains constant. D. Becomes zero.

Which cash flows are relevant in DCF?. A. Sunk costs. B. Opportunity costs. C. Historical costs. D. Accounting depreciation.

A positive NPV project: A. Decreases firm value. B. Has IRR below cost of capital. C. Increases shareholder wealth. D. Should be rejected.

NPV assumes reinvestment at: A. IRR. B. Discount rate. C. Inflation rate. D. Growth rate.

If discount rate increases, NPV: A. Increases. B. Decreases. C. Unchanged. D. Becomes positive.

A project with NPV = 0 implies: A. Loss. B. Break-even in accounting terms. C. Earns required return. D. Should be rejected.

Which is NOT a DCF method?. A. NPV. B. IRR. C. Payback. D. Discounted payback.

Terminal value represents: A. Initial investment. B. Salvage value. C. Value beyond forecast horizon. D. Sunk cost.

Incremental cash flows include: A. Financing costs. B. Side effects. C. Depreciation only. D. Historical expenses.

Opportunity cost is: A. Cash inflow. B. Foregone benefit. C. Sunk cost. D. Accounting expense.

NPV profiles show: A. NPV vs. cash flow. B. NPV vs. discount rate. C. IRR vs. time. D. Profit vs. sales.

Mutually exclusive projects should be evaluated using: A. Payback. B. IRR only. C. NPV. D. Accounting return.

The biggest advantage of NPV is that it: A. Is simple. B. Uses accounting profits. C. Measures value creation directly. D. Ignores risk.