BU393 Financial Management II – Winter – Financial
Management II Final Exam Questions with Verified
Answers Study Guide
Introduction
This document contains a comprehensive set of BU393
Financial Management II final exam questions with verified
answers covering the core concepts of corporate finance and
investment analysis. Topics include capital budgeting, time
value of money, risk and return, CAPM, WACC, capital
structure, dividend policy, financial ratios, derivatives,
working capital management, mergers and acquisitions, and
international finance. It serves as a complete revision guide
for students preparing for the Winter 2018 BU393 final
examination and reviewing key financial management
theories and applications.
Exams Questions and Answers
1: What is the primary goal of financial management in a
corporation?--- correct precise answer --- The primary goal of
financial management in a corporation is to maximize
shareholder wealth, which is typically reflected in the
maximization of the companys stock price.
2: Explain the concept of the time value of money.--- correct
precise answer ---
,The time value of money is the idea that a sum of money is
worth more now than the same sum will be in the future due
to its potential earning capacity. This concept is the
foundation for discounted cash flow analysis and is used in
valuing investments and comparing cash flows at different
times.
3: What is the difference between systematic and
unsystematic risk?--- correct precise answer --- Systematic
risk, also known as market risk, affects the entire market and
cannot be eliminated through diversification. Unsystematic
risk, or specific risk, is unique to a particular company or
industry and can be reduced through diversification.
4: Describe the Modigliani-Miller theorem on capital
structure.--- correct precise answer ---
The Modigliani-Miller theorem states that in a perfect market,
the value of a firm is unaffected by its capital structure. This
implies that the way a firm finances itself (through debt or
equity) does not affect its overall value, assuming no taxes,
bankruptcy costs, or asymmetric information.
5: How does the dividend discount model (DDM) value a
stock?--- correct precise answer ---
The dividend discount model (DDM) values a stock by
calculating the present value of all expected future dividends.
The model assumes that dividends grow at a constant rate and
, uses this growth rate along with the required rate of return to
determine the stocks value.
6: What is the weighted average cost of capital (WACC) and
why is it important?--- correct precise answer ---
The weighted average cost of capital (WACC) is the average
rate of return a company is expected to pay its security
holders to finance its assets. It is important because it
represents the minimum return that a company must earn on
its asset base to satisfy its creditors, owners, and other
providers of capital.
7: Explain the concept of financial leverage.--- correct precise
answer ---
Financial leverage refers to the use of debt in a companys
capital structure. It is the degree to which a company uses
fixed-income securities such as debt and preferred equity.
Financial leverage can amplify both gains and losses, making
the companys earnings more volatile.
8: What is the difference between operating leverage and
financial leverage?--- correct precise answer --- Operating
leverage is the degree to which a firm can use fixed operating
costs to magnify the effects of changes in sales on its
operating income.
Financial leverage, on the other hand, involves the use of debt
to increase the potential return on equity. Both types of
leverage can increase risk.
Management II Final Exam Questions with Verified
Answers Study Guide
Introduction
This document contains a comprehensive set of BU393
Financial Management II final exam questions with verified
answers covering the core concepts of corporate finance and
investment analysis. Topics include capital budgeting, time
value of money, risk and return, CAPM, WACC, capital
structure, dividend policy, financial ratios, derivatives,
working capital management, mergers and acquisitions, and
international finance. It serves as a complete revision guide
for students preparing for the Winter 2018 BU393 final
examination and reviewing key financial management
theories and applications.
Exams Questions and Answers
1: What is the primary goal of financial management in a
corporation?--- correct precise answer --- The primary goal of
financial management in a corporation is to maximize
shareholder wealth, which is typically reflected in the
maximization of the companys stock price.
2: Explain the concept of the time value of money.--- correct
precise answer ---
,The time value of money is the idea that a sum of money is
worth more now than the same sum will be in the future due
to its potential earning capacity. This concept is the
foundation for discounted cash flow analysis and is used in
valuing investments and comparing cash flows at different
times.
3: What is the difference between systematic and
unsystematic risk?--- correct precise answer --- Systematic
risk, also known as market risk, affects the entire market and
cannot be eliminated through diversification. Unsystematic
risk, or specific risk, is unique to a particular company or
industry and can be reduced through diversification.
4: Describe the Modigliani-Miller theorem on capital
structure.--- correct precise answer ---
The Modigliani-Miller theorem states that in a perfect market,
the value of a firm is unaffected by its capital structure. This
implies that the way a firm finances itself (through debt or
equity) does not affect its overall value, assuming no taxes,
bankruptcy costs, or asymmetric information.
5: How does the dividend discount model (DDM) value a
stock?--- correct precise answer ---
The dividend discount model (DDM) values a stock by
calculating the present value of all expected future dividends.
The model assumes that dividends grow at a constant rate and
, uses this growth rate along with the required rate of return to
determine the stocks value.
6: What is the weighted average cost of capital (WACC) and
why is it important?--- correct precise answer ---
The weighted average cost of capital (WACC) is the average
rate of return a company is expected to pay its security
holders to finance its assets. It is important because it
represents the minimum return that a company must earn on
its asset base to satisfy its creditors, owners, and other
providers of capital.
7: Explain the concept of financial leverage.--- correct precise
answer ---
Financial leverage refers to the use of debt in a companys
capital structure. It is the degree to which a company uses
fixed-income securities such as debt and preferred equity.
Financial leverage can amplify both gains and losses, making
the companys earnings more volatile.
8: What is the difference between operating leverage and
financial leverage?--- correct precise answer --- Operating
leverage is the degree to which a firm can use fixed operating
costs to magnify the effects of changes in sales on its
operating income.
Financial leverage, on the other hand, involves the use of debt
to increase the potential return on equity. Both types of
leverage can increase risk.
