BA 4100
Business Finance
MIDTERM EXAM
Q&S
©2024/2025
,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximizing profits
b) Minimizing risks
c) Maximizing shareholder wealth
d) Minimizing expenses
Answer: c) Maximizing shareholder wealth
Rationale: The primary goal is to maximize shareholder wealth,
as it reflects the overall value of the company and considers long-
term growth, risk management, and profitability.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for an uncertain cash flow.
Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM is used to calculate the required return on
equity or the cost of equity, which is the discount rate for uncertain
cash flows in project valuation.
3. True/False: The Modigliani-Miller theorem states that, in the
absence of taxes, bankruptcy costs, agency costs, and asymmetric
information, the value of a firm is unaffected by how that firm is
financed.
Answer: True
©2024/2025
, Rationale: The theorem suggests that under certain conditions,
the capital structure of a company does not affect its overall value.
4. Multiple Response: Which of the following are considered
short-term financial management decisions? (Select all that apply)
a) Capital budgeting
b) Dividend policy
c) Inventory management
d) Credit policy
Answers: c) Inventory management, d) Credit policy
Rationale: Inventory and credit policies are part of working
capital management, which is concerned with short-term financial
decisions.
5. Multiple Choice: In the context of capital structure, what does
'pecking order theory' suggest?
a) Firms prefer to finance new projects using internal funds
b) Firms prefer to issue debt rather than equity when external
financing is needed
c) Firms have no preference between debt and equity financing
d) Both a and b
Answer: d) Both a and b
©2024/2025
, Rationale: Pecking order theory suggests that companies
prioritize their sources of financing, preferring internal financing
first and debt over equity if external financing is needed.
6. Fill-in-the-Blank: The __________ ratio is a liquidity ratio that
measures a company's ability to pay off its current liabilities with its
current assets.
Answer: Current
Rationale: The current ratio is an indicator of a firm's short-term
liquidity and is calculated by dividing current assets by current
liabilities.
7. True/False: In financial management, 'hedging' refers to taking a
position in one market to offset exposure to price fluctuations in
some opposite position in another market with the goal of
minimizing one's exposure to unwanted risk.
Answer: True
Rationale: Hedging is a risk management strategy used to limit or
offset probability of loss from fluctuations in the prices of
commodities, currencies, or securities.
8. Multiple Response: Which of the following factors affect the cost
of capital? (Select all that apply)
a) Market conditions
b) Company's operating performance
©2024/2025
Business Finance
MIDTERM EXAM
Q&S
©2024/2025
,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximizing profits
b) Minimizing risks
c) Maximizing shareholder wealth
d) Minimizing expenses
Answer: c) Maximizing shareholder wealth
Rationale: The primary goal is to maximize shareholder wealth,
as it reflects the overall value of the company and considers long-
term growth, risk management, and profitability.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for an uncertain cash flow.
Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM is used to calculate the required return on
equity or the cost of equity, which is the discount rate for uncertain
cash flows in project valuation.
3. True/False: The Modigliani-Miller theorem states that, in the
absence of taxes, bankruptcy costs, agency costs, and asymmetric
information, the value of a firm is unaffected by how that firm is
financed.
Answer: True
©2024/2025
, Rationale: The theorem suggests that under certain conditions,
the capital structure of a company does not affect its overall value.
4. Multiple Response: Which of the following are considered
short-term financial management decisions? (Select all that apply)
a) Capital budgeting
b) Dividend policy
c) Inventory management
d) Credit policy
Answers: c) Inventory management, d) Credit policy
Rationale: Inventory and credit policies are part of working
capital management, which is concerned with short-term financial
decisions.
5. Multiple Choice: In the context of capital structure, what does
'pecking order theory' suggest?
a) Firms prefer to finance new projects using internal funds
b) Firms prefer to issue debt rather than equity when external
financing is needed
c) Firms have no preference between debt and equity financing
d) Both a and b
Answer: d) Both a and b
©2024/2025
, Rationale: Pecking order theory suggests that companies
prioritize their sources of financing, preferring internal financing
first and debt over equity if external financing is needed.
6. Fill-in-the-Blank: The __________ ratio is a liquidity ratio that
measures a company's ability to pay off its current liabilities with its
current assets.
Answer: Current
Rationale: The current ratio is an indicator of a firm's short-term
liquidity and is calculated by dividing current assets by current
liabilities.
7. True/False: In financial management, 'hedging' refers to taking a
position in one market to offset exposure to price fluctuations in
some opposite position in another market with the goal of
minimizing one's exposure to unwanted risk.
Answer: True
Rationale: Hedging is a risk management strategy used to limit or
offset probability of loss from fluctuations in the prices of
commodities, currencies, or securities.
8. Multiple Response: Which of the following factors affect the cost
of capital? (Select all that apply)
a) Market conditions
b) Company's operating performance
©2024/2025
