Business Finance

What does the Modigliani-Miller theorem suggest about the relationship between a firm’s capital structure and its value under the assumption of no taxes?

• The firm's value is maximised when there is no debt

• The firm's value is independent of its capital structure

• The firm's value increases with the level of debt

•   The firm’s value depends entirely on its equity capital

If the Beta coefficient of a stock is 1.5, what does this imply about the stock’s risk relative to the market?

• The stock is half as risky as the market

• The stock is more volatile than the market

• The stock has no correlation with the market

• The stock is less risky than the market

The Sharpe ratio is used to:

• Measure the risk-adjusted return of an investment

• Calculate the volatility of an asset

• Find the required return based on market conditions

• Estimate the beta of a stock

.        When analysing capital budgeting, the net present value (NPV) method assumes:

• All future cash flows are discounted at the company’s cost of debt

• Cashflows are discounted to present value at cost of capital.

• Future cash flows are equal to the present cash inflows

• Only cash inflows are considered, ignoring outflows

Which of the following best describes an options contract?

• A contract that grants the right, but not the obligation, to buy or sell an asset at a predetermined price

• A contract where both parties are required to buy and sell an asset at a set price

• A financial instrument used to lend money to corporations

• A fixed-term deposit with a fixed interest rate

Hedging using derivatives primarily aims to:

• Increase profits in the short-term

• Lock in future prices to reduce uncertainty about future cash flows

• Speculate on market movements

• Minimize tax liabilities

In the capital asset pricing model (CAPM), the market risk premium is defined as:

• The difference between the total return and the market return

• The Excess of market return over the risk-free rate

• The return expected from an asset with zero risk

• The risk-free rate minus the market risk

A company repurchasing its own stock is likely to:

• Always increase the stock price due to reduced supply

• Reduce the number of outstanding shares, which can increase earnings per share (EPS)

• Always decrease shareholder value

• Automatically signal financial trouble for the company

Which of the following is NOT a typical feature of a leveraged buyout (LBO)?

• A significant portion of the purchase price is financed by debt

• The acquiring firm targets high-growth companies

• Large personal investment by the acquiring firm

• The firm may use its assets as collateral to borrow capital

If a company’s current ratio is less than 1, it indicates:

• The company may face difficulties in meeting its short-term liabilities

• The company is highly liquid and can pay off its short-term debts easily

• The company is financially healthy

• The company has excessive current liabilities