Fundamentals of Corporate Finance Questions with Correct Answers| New Update with
Guaranteed Success
Capital budgeting Evaluating long-term investments like property, plant, equipment, or new
projects to ensure they add value to the firm.
Quick Ratio Measures a company's short-term liquidity — not used for long-term capital
budgeting decisions.
Internal Rate of Return (IRR) The discount rate that results in a Net Present Value (NPV) of
zero.
Cost of debt Typically computed after taxes because interest is tax-deductible.
Payback Period The method that ignores the time value of money and looks at how long it
takes to recover the initial investment.
Time Value of Money The principle that recognizes the earning potential of money over
time — a peso today can be invested to earn interest.
Capital budgeting decisions Typically involve evaluating and selecting long-term investments
in assets and projects.
Net Present Value (NPV) Calculates the value a project adds to the firm in monetary terms
— a direct measure of added profitability.
IRR lower than cost of capital Indicates the project should be rejected as it would reduce
shareholder value.
IRR If IRR is below the cost of capital (hurdle rate), the project would reduce shareholder
value and should be rejected.
, Throughput analysis Throughput analysis calculates profitability after covering variable costs
— the amount contributing to covering fixed costs and profits.
Payback Period method advantage The simplicity of the payback period makes it popular,
though it has limitations like ignoring the time value of money and later cash flows.
Positive NPV in capital budgeting A positive NPV means the project is expected to generate
cash flows greater than the cost of capital, adding value to the company.
Drawback of the IRR method When cash flows switch between positive and negative more
than once, multiple IRRs can occur, creating decision-making difficulties.
Most theoretically sound capital budgeting method NPV is widely considered the best
capital budgeting technique because it considers both the timing and value of all cash flows.
Difference between capital and operational budgeting Capital budgeting evaluates long-
term investments, while operational budgeting focuses on short-term revenue and expenses.
Capital structure exclusion Capital structure consists of long-term financing sources like
equity and debt. Trade payables are short-term liabilities and part of working capital.
Constant Dividend Policy In a constant dividend policy, a fixed percentage of net income is
paid out as dividends, making the payout fluctuate with profits.
Residual Dividend Policy A residual policy pays dividends only after meeting reinvestment
needs for projects and working capital.
Benefit of debt financing Interest payments are tax-deductible.
Guaranteed Success
Capital budgeting Evaluating long-term investments like property, plant, equipment, or new
projects to ensure they add value to the firm.
Quick Ratio Measures a company's short-term liquidity — not used for long-term capital
budgeting decisions.
Internal Rate of Return (IRR) The discount rate that results in a Net Present Value (NPV) of
zero.
Cost of debt Typically computed after taxes because interest is tax-deductible.
Payback Period The method that ignores the time value of money and looks at how long it
takes to recover the initial investment.
Time Value of Money The principle that recognizes the earning potential of money over
time — a peso today can be invested to earn interest.
Capital budgeting decisions Typically involve evaluating and selecting long-term investments
in assets and projects.
Net Present Value (NPV) Calculates the value a project adds to the firm in monetary terms
— a direct measure of added profitability.
IRR lower than cost of capital Indicates the project should be rejected as it would reduce
shareholder value.
IRR If IRR is below the cost of capital (hurdle rate), the project would reduce shareholder
value and should be rejected.
, Throughput analysis Throughput analysis calculates profitability after covering variable costs
— the amount contributing to covering fixed costs and profits.
Payback Period method advantage The simplicity of the payback period makes it popular,
though it has limitations like ignoring the time value of money and later cash flows.
Positive NPV in capital budgeting A positive NPV means the project is expected to generate
cash flows greater than the cost of capital, adding value to the company.
Drawback of the IRR method When cash flows switch between positive and negative more
than once, multiple IRRs can occur, creating decision-making difficulties.
Most theoretically sound capital budgeting method NPV is widely considered the best
capital budgeting technique because it considers both the timing and value of all cash flows.
Difference between capital and operational budgeting Capital budgeting evaluates long-
term investments, while operational budgeting focuses on short-term revenue and expenses.
Capital structure exclusion Capital structure consists of long-term financing sources like
equity and debt. Trade payables are short-term liabilities and part of working capital.
Constant Dividend Policy In a constant dividend policy, a fixed percentage of net income is
paid out as dividends, making the payout fluctuate with profits.
Residual Dividend Policy A residual policy pays dividends only after meeting reinvestment
needs for projects and working capital.
Benefit of debt financing Interest payments are tax-deductible.
