ACF Final Exam Questions with Correct Answers Latest Update 2025
T/F WACC formula works for the "AVERAGE RISK" project - Answers True
T/F When calculating WACC for firm, one should only use MARKET values of DEBT and EQUITY - Answers
True
T/F Discounting @ WACC assumes debt is rebalanced every period to maintain constant ratio debt to
market value of firm - Answers True
T/F Discounting @ WACC assumes that the ratio of the debt supported by a project to the project's
value remains UNCHANGED over the project's economic life - Answers True
T/F When calculating WACC for firm, one should only use BOOK values of debts & equity - Answers False
T/F The WACC formula works for the "average risk" project - Answers True
T/F Discounting @ WACC assumes that the ratio of the debt supported by a project to the project's
value VARIES over the project's economic life - Answers False
You are presented with a two-stage FCFF valuation model. Which is the best tax rate to use? - Answers
use ETR in aggressive growth stage, MTR in stable growth stage
Which factors determine asset beta of the firm? - Answers Operating leverage & nature of product
offered by the company
A firm has both equity and debt in its capital structure. If a project has a negative NPV (according to the
WACC), how is this value split between the equity and debt holders? - Answers All goes to debt because
equity has limited liability.
Which costs in the following list represent indirect cost of financial distress? - Answers Selling assets to
meet financial obligations
Conditions of bankruptcy - Answers z<1.2 Bankrupt
1.2<z<2.9 Grey Area - recover or decline in credit worthiness
z>2.9 unlikely to go bankrupt
Which of the following situations might a stock repurchase result in decreased firm value? - Answers
When a firm executes a targeted repurchase in order to buy back shares from specific shareholders at
above market prices
T/F Venture capitalists typically provide first stage financing sufficient to cover all development
expenses. Second-stage financing is provided by stock issued in an IPO - Answers False
T/F Large companies' stock may be listed and traded on several different international exchanges -
Answers True
, T/F Stock price generally falls when the company announced a new issue of shares. This is attributable
to the information released by the decision to issue - Answers True
T/F Although announcement of dividend payment results in increase in price of stock, on average,
announcement of repurchase of shares does not seem to affect stock price - Answers False
T/F Both announcement of dividend payment & announcement of share repurchase tend to result in
increase in stock price of same magnitude when they result in similar payouts - Answers True
T/F Stock splits and stock dividends are simply accounting changes; market recognizes this & thus stock
price is unaffected by announcement of stock split or stock dividend. - Answers False
T/F In financial markets, riskier firms have lower PEG ratios and higher PE ratios. - Answers True
T/F Firms with higher expected growth rate have lower PE ratio - Answers False
T/F Firms with more efficient growth have higher PEG ratios and lower PE ratios - Answers False
T/F The firm's equity beta is usually higher than firm's asset beta - Answers True
T/F A combination of high PBV ratio & low expected return on equity suggests overvalued stock. -
Answers False
T/F Other things equal, higher-growth stock have higher PBV ratio than lower growth stock - Answers
True
T/F Firms with higher dividend payout will have a higher fundamental PBV ratio - Answers False
High-risk firms - Answers Low current earnings
Low PE ratio
"Hell"
Companies that have experienced an UNEXPECTED decline in profits - Answers High current earnings
High PE ratios
"uhh"
Companies that EXPECT to experience a decline in profits - Answers Low current earnings
Low PE ratio
"lolol"
Growth companies with valuable future investment opportunities - Answers Low current earnings
High PE ratio
T/F WACC formula works for the "AVERAGE RISK" project - Answers True
T/F When calculating WACC for firm, one should only use MARKET values of DEBT and EQUITY - Answers
True
T/F Discounting @ WACC assumes debt is rebalanced every period to maintain constant ratio debt to
market value of firm - Answers True
T/F Discounting @ WACC assumes that the ratio of the debt supported by a project to the project's
value remains UNCHANGED over the project's economic life - Answers True
T/F When calculating WACC for firm, one should only use BOOK values of debts & equity - Answers False
T/F The WACC formula works for the "average risk" project - Answers True
T/F Discounting @ WACC assumes that the ratio of the debt supported by a project to the project's
value VARIES over the project's economic life - Answers False
You are presented with a two-stage FCFF valuation model. Which is the best tax rate to use? - Answers
use ETR in aggressive growth stage, MTR in stable growth stage
Which factors determine asset beta of the firm? - Answers Operating leverage & nature of product
offered by the company
A firm has both equity and debt in its capital structure. If a project has a negative NPV (according to the
WACC), how is this value split between the equity and debt holders? - Answers All goes to debt because
equity has limited liability.
Which costs in the following list represent indirect cost of financial distress? - Answers Selling assets to
meet financial obligations
Conditions of bankruptcy - Answers z<1.2 Bankrupt
1.2<z<2.9 Grey Area - recover or decline in credit worthiness
z>2.9 unlikely to go bankrupt
Which of the following situations might a stock repurchase result in decreased firm value? - Answers
When a firm executes a targeted repurchase in order to buy back shares from specific shareholders at
above market prices
T/F Venture capitalists typically provide first stage financing sufficient to cover all development
expenses. Second-stage financing is provided by stock issued in an IPO - Answers False
T/F Large companies' stock may be listed and traded on several different international exchanges -
Answers True
, T/F Stock price generally falls when the company announced a new issue of shares. This is attributable
to the information released by the decision to issue - Answers True
T/F Although announcement of dividend payment results in increase in price of stock, on average,
announcement of repurchase of shares does not seem to affect stock price - Answers False
T/F Both announcement of dividend payment & announcement of share repurchase tend to result in
increase in stock price of same magnitude when they result in similar payouts - Answers True
T/F Stock splits and stock dividends are simply accounting changes; market recognizes this & thus stock
price is unaffected by announcement of stock split or stock dividend. - Answers False
T/F In financial markets, riskier firms have lower PEG ratios and higher PE ratios. - Answers True
T/F Firms with higher expected growth rate have lower PE ratio - Answers False
T/F Firms with more efficient growth have higher PEG ratios and lower PE ratios - Answers False
T/F The firm's equity beta is usually higher than firm's asset beta - Answers True
T/F A combination of high PBV ratio & low expected return on equity suggests overvalued stock. -
Answers False
T/F Other things equal, higher-growth stock have higher PBV ratio than lower growth stock - Answers
True
T/F Firms with higher dividend payout will have a higher fundamental PBV ratio - Answers False
High-risk firms - Answers Low current earnings
Low PE ratio
"Hell"
Companies that have experienced an UNEXPECTED decline in profits - Answers High current earnings
High PE ratios
"uhh"
Companies that EXPECT to experience a decline in profits - Answers Low current earnings
Low PE ratio
"lolol"
Growth companies with valuable future investment opportunities - Answers Low current earnings
High PE ratio
