D775 - Assessment Study Guide PART 1 UPDATED ACTUAL
Questions and CORRECT Answers
Which principle guides business finance to optimize Risk-return tradeoff
resource use? 3 multiple choice options
Which activity describes capital raising in business Securing funding for business operations and projects
finance? 3 multiple choice options
Which finance activity involves the creation, circulation, Setting monetary policy
and management of money? 3 multiple choice options
What is common stock? A share of ownership in a firm with voting rights
3 multiple choice options
What is a characteristic of preferred stock? Fixed dividends
3 multiple choice options
What is the purpose of bonds from the perspective of To raise capital without diluting ownership
issuers? 3 multiple choice options
Which type of bonds are considered junk bonds? Speculative bonds
3 multiple choice options
Which type of investment vehicle is uniquely used for 401k plans
retirement savings? 3 multiple choice options
What is true about options in financial derivatives? They give the buyer the right, but not the obligation, to buy or sell an asset.
3 multiple choice options
How do funds benefit from economies of scale? By making large-scale investments that reduce transaction costs
3 multiple choice options
What is an initial public offering (IPO)? The first sale of a company's stock to the public
3 multiple choice options
, A company is evaluating a project with the following cash The project is not profitable and should be rejected.
flows: 3 multiple choice options
Initial investment: $100,000
Year 1 cash inflow: $40,000
Year 2 cash inflow: $50,000
Year 3 cash inflow: $30,000
The company's cost of capital is 10%.
The calculated NPV is approximately −$3,900.
What does the project's Net Present Value (NPV) indicate
about its profitability?
Which project type would likely require a capital Expanding to a new market
budgeting decision? 3 multiple choice options
A real estate development company is evaluating a The project should be undertaken because it is expected to generate more value
proposed residential project. After conducting a capital than costs.
budgeting analysis, the company calculates a Net Present 3 multiple choice options
Value (NPV) of $500,000 for the project.
What is a limitation of the payback method when It can be complicated to apply to a long-term investment.
evaluating a long-term investment? 3 multiple choice options
Why might a company be hesitant to raise new debt Taking on additional debt could increase the company's default risk and raise its
capital? cost of capital, making future borrowing more expensive.
3 multiple choice options
A regional food and beverage company faces strong To fund expansion and new product development
competitive pressure in a rapidly consolidating industry. 3 multiple choice options
Why might this company need new capital?
A mid-sized manufacturing company plans to expand its When it prefers to use internal funds instead of seeking external funding options
production capacity to meet growing demand. The 3 multiple choice options
company is considering different funding options to
finance this expansion.
Which situation might cause the company to use retained
earnings to fund an expansion?
Why might a high beta increase the cost of equity? It indicates higher risk, which requires higher returns.
3 multiple choice options
A construction firm is entirely financed through loans and It is equal to the after-tax cost of debt, as no equity financing costs are involved.
bonds rather than equity. To evaluate new investment 3 multiple choice options
opportunities, the firm must determine its cost of capital.
What can be determined about the firm's cost of capital?
How is the cost of capital typically measured? As a percentage return
3 multiple choice options
Questions and CORRECT Answers
Which principle guides business finance to optimize Risk-return tradeoff
resource use? 3 multiple choice options
Which activity describes capital raising in business Securing funding for business operations and projects
finance? 3 multiple choice options
Which finance activity involves the creation, circulation, Setting monetary policy
and management of money? 3 multiple choice options
What is common stock? A share of ownership in a firm with voting rights
3 multiple choice options
What is a characteristic of preferred stock? Fixed dividends
3 multiple choice options
What is the purpose of bonds from the perspective of To raise capital without diluting ownership
issuers? 3 multiple choice options
Which type of bonds are considered junk bonds? Speculative bonds
3 multiple choice options
Which type of investment vehicle is uniquely used for 401k plans
retirement savings? 3 multiple choice options
What is true about options in financial derivatives? They give the buyer the right, but not the obligation, to buy or sell an asset.
3 multiple choice options
How do funds benefit from economies of scale? By making large-scale investments that reduce transaction costs
3 multiple choice options
What is an initial public offering (IPO)? The first sale of a company's stock to the public
3 multiple choice options
, A company is evaluating a project with the following cash The project is not profitable and should be rejected.
flows: 3 multiple choice options
Initial investment: $100,000
Year 1 cash inflow: $40,000
Year 2 cash inflow: $50,000
Year 3 cash inflow: $30,000
The company's cost of capital is 10%.
The calculated NPV is approximately −$3,900.
What does the project's Net Present Value (NPV) indicate
about its profitability?
Which project type would likely require a capital Expanding to a new market
budgeting decision? 3 multiple choice options
A real estate development company is evaluating a The project should be undertaken because it is expected to generate more value
proposed residential project. After conducting a capital than costs.
budgeting analysis, the company calculates a Net Present 3 multiple choice options
Value (NPV) of $500,000 for the project.
What is a limitation of the payback method when It can be complicated to apply to a long-term investment.
evaluating a long-term investment? 3 multiple choice options
Why might a company be hesitant to raise new debt Taking on additional debt could increase the company's default risk and raise its
capital? cost of capital, making future borrowing more expensive.
3 multiple choice options
A regional food and beverage company faces strong To fund expansion and new product development
competitive pressure in a rapidly consolidating industry. 3 multiple choice options
Why might this company need new capital?
A mid-sized manufacturing company plans to expand its When it prefers to use internal funds instead of seeking external funding options
production capacity to meet growing demand. The 3 multiple choice options
company is considering different funding options to
finance this expansion.
Which situation might cause the company to use retained
earnings to fund an expansion?
Why might a high beta increase the cost of equity? It indicates higher risk, which requires higher returns.
3 multiple choice options
A construction firm is entirely financed through loans and It is equal to the after-tax cost of debt, as no equity financing costs are involved.
bonds rather than equity. To evaluate new investment 3 multiple choice options
opportunities, the firm must determine its cost of capital.
What can be determined about the firm's cost of capital?
How is the cost of capital typically measured? As a percentage return
3 multiple choice options
