MBA Prep CFIN New Exam Questions And
Correct Answers (A+)
The cost of capital can be defined as - ANSWER the weighted average cost of attracting
investors to the firm, the price of obtaining funding for the firm, weighted according to
the target ratios in the capital structure, the weighted average return that investors
inthe firm require
A target of capital cost is - ANSWER always implied unless the term existing or current
is used, the capitalization that management is shooting for, the capitalization that will
result after an asset is financed
The marginal cost of capital is - ANSWER minimum cost of recreating a company's
capital structure in the current marketplace, used for an average hurdle rate because it
includes the market's assessment of future company risk
The marginal cost of debt - ANSWER after-tax cost because interest expenses are
deductible
The marginal cost of equity - ANSWER should be derived from a comparison of several
available techniques
Cost of convertible funds - ANSWER Depends on whether a conversion has taken place
If a convertible has been converted to common stock, then its current cost is the same
as the cost of retained earnings - ANSWER True
If a firm uses hurdle rates that are consistently above its marginal cost of capital, then -
ANSWER it will have fewer and fewer investment alternatives, the risk of the firm will
increase
,A firm with high fixed costs, such as manufacturing overhead, has a greater degree of
risk in the trough of a business cycle than does a firm with variable costs and very low
fixed costs. - ANSWER True
Efficiency market theory can be considered to be reasonable since hundreds of
financial analysts price securities, 100s of investors try to make money from poorly
priced securities, statistical analysis is becoming increasingly significant, and market
forces that results drive stock prices to their fair value.
The illiquidity risk is relatively higher for debt holders as compared to the share owners
of a public company - ANSWER True
A firm's marginal cost of capital can be used as its average hurdle rate because -
ANSWER it is a composite figure which represents the average risk of the firm
If analysts uses the percentage of debt and equity on a firm's balance sheet and the
interest charges from its income statement to calculate the cost of capital then, -
ANSWER the current weighted average will result
Which of the following statements about bonds is always true - ANSWER The YTM equals
the internal rate of return on a bond's cash flows
THe price of a bond can be calculated by discounting the outstanding coupons and
maturity value by a factor which is equal to the current yield to maturity earned on
bonds of comparable risk - ANSWER True
Firms that pay out a large proportion of their earnings in dividends will have a higher
cost of equity than firms that pay no dividends - ANSWER False
The risk-free rate of return used to determine a firm's cost of capital will vary depending
upon the financial and operating risk level of the firm - ANSWER False
, Project Investments are generally less complicated than mergers because - ANSWER
the potential benefits of project investments are more obvious
Synergy between two companies - ANSWER complementary situation where value is
created in the joining of the firms, could be defined by purely qualitative benefits
legalities determine whether a merger should occur; a valuation determines what form
the business combination shall be - ANSWER False
Unlike capital budgeting derivations, it is best when evaluating mergers to rely son a
single quantitative method: this ensure's consistnecy - ANSWER False
Book value is unlike liquidation value and replacement value because - ANSWER the
latter two are market driven, it depends more fully on accounting methods
THe weakest link in earnings valuation is - ANSWER projecting the post-merger P/E
The dilution of earnings method is not a valuation method at all; it simply determines the
maximum price the company can pay without having a reduced EPS next year -
ANSWER True
Which of the following statements are true about relevant cash flow valuations -
ANSWER they consider the target to be a going concern, they allow for the obligations
to debt holders, no two investments can be analyzed using the same hurdle rate
An asset has been generating cash flows that, in the opinion of a valuer, can reasonably
be assumed to have leveled off. Thus, that asset can be represented by an estimate of a
cash flow in perpetuity as a residual value. ANSWER True
The absolute maximum price that should ever be paid for a target from an acquirer's
perspective is - ANSWER the PV of the target's enhanced cash flows, discounted by the
target's appropriate cost of capital
Correct Answers (A+)
The cost of capital can be defined as - ANSWER the weighted average cost of attracting
investors to the firm, the price of obtaining funding for the firm, weighted according to
the target ratios in the capital structure, the weighted average return that investors
inthe firm require
A target of capital cost is - ANSWER always implied unless the term existing or current
is used, the capitalization that management is shooting for, the capitalization that will
result after an asset is financed
The marginal cost of capital is - ANSWER minimum cost of recreating a company's
capital structure in the current marketplace, used for an average hurdle rate because it
includes the market's assessment of future company risk
The marginal cost of debt - ANSWER after-tax cost because interest expenses are
deductible
The marginal cost of equity - ANSWER should be derived from a comparison of several
available techniques
Cost of convertible funds - ANSWER Depends on whether a conversion has taken place
If a convertible has been converted to common stock, then its current cost is the same
as the cost of retained earnings - ANSWER True
If a firm uses hurdle rates that are consistently above its marginal cost of capital, then -
ANSWER it will have fewer and fewer investment alternatives, the risk of the firm will
increase
,A firm with high fixed costs, such as manufacturing overhead, has a greater degree of
risk in the trough of a business cycle than does a firm with variable costs and very low
fixed costs. - ANSWER True
Efficiency market theory can be considered to be reasonable since hundreds of
financial analysts price securities, 100s of investors try to make money from poorly
priced securities, statistical analysis is becoming increasingly significant, and market
forces that results drive stock prices to their fair value.
The illiquidity risk is relatively higher for debt holders as compared to the share owners
of a public company - ANSWER True
A firm's marginal cost of capital can be used as its average hurdle rate because -
ANSWER it is a composite figure which represents the average risk of the firm
If analysts uses the percentage of debt and equity on a firm's balance sheet and the
interest charges from its income statement to calculate the cost of capital then, -
ANSWER the current weighted average will result
Which of the following statements about bonds is always true - ANSWER The YTM equals
the internal rate of return on a bond's cash flows
THe price of a bond can be calculated by discounting the outstanding coupons and
maturity value by a factor which is equal to the current yield to maturity earned on
bonds of comparable risk - ANSWER True
Firms that pay out a large proportion of their earnings in dividends will have a higher
cost of equity than firms that pay no dividends - ANSWER False
The risk-free rate of return used to determine a firm's cost of capital will vary depending
upon the financial and operating risk level of the firm - ANSWER False
, Project Investments are generally less complicated than mergers because - ANSWER
the potential benefits of project investments are more obvious
Synergy between two companies - ANSWER complementary situation where value is
created in the joining of the firms, could be defined by purely qualitative benefits
legalities determine whether a merger should occur; a valuation determines what form
the business combination shall be - ANSWER False
Unlike capital budgeting derivations, it is best when evaluating mergers to rely son a
single quantitative method: this ensure's consistnecy - ANSWER False
Book value is unlike liquidation value and replacement value because - ANSWER the
latter two are market driven, it depends more fully on accounting methods
THe weakest link in earnings valuation is - ANSWER projecting the post-merger P/E
The dilution of earnings method is not a valuation method at all; it simply determines the
maximum price the company can pay without having a reduced EPS next year -
ANSWER True
Which of the following statements are true about relevant cash flow valuations -
ANSWER they consider the target to be a going concern, they allow for the obligations
to debt holders, no two investments can be analyzed using the same hurdle rate
An asset has been generating cash flows that, in the opinion of a valuer, can reasonably
be assumed to have leveled off. Thus, that asset can be represented by an estimate of a
cash flow in perpetuity as a residual value. ANSWER True
The absolute maximum price that should ever be paid for a target from an acquirer's
perspective is - ANSWER the PV of the target's enhanced cash flows, discounted by the
target's appropriate cost of capital
