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WorksheetsA. Introduction to Corporate Finance (1–15)
Total questions: 100
Worksheet time: 50mins
The primary objective of financial management in a company is...
Increase net profit
Maximize sales
Maximize firm value
Minimize operating costs
The conflict of interest between managers and shareholders is called...
Capital conflict
Agency problem
Market risk
Strategic bias
In a company’s organizational structure, the CFO is responsible for...
Marketing
Product development
Investment and financing decisions
Human resources oversight
An example of an investment decision is...
Taking a bank loan
Determining dividends
Building a new plant
Issuing bonds
The primary market is a place where...
Shares are traded among investors
Companies issue new securities
Investors resell old shares
Foreign exchange is traded
A good financing decision aims to...
Increase fixed assets
Reduce operational risk
Minimize cost of capital
Reduce corporate taxes
Systematic risk is a risk that...
Can be eliminated through diversification
Occurs only in certain industries
Is driven by overall market conditions
Comes from managers’ internal decisions
An example of unsystematic risk is...
Inflation
Economic recession
Government policy
A worker strike at the company
Agency cost arises because...
Information is asymmetric
Sales decline
Operating costs increase
The capital structure is not optimal
In corporate finance, “capital budgeting” means...
Managing daily cash
Analyzing investment projects
Calculating taxes owed
Selling company assets
The cost of capital is influenced by...
Market interest rates
Dividends distributed
Operating expenditures
Raw material prices
A company’s profit is maximized when...
Production volume increases
The market value of the stock increases
Operating expenses are reduced
All debt is fully repaid
Good corporate governance helps reduce...
Stock returns
Systematic risk
Agency cost
The inflation rate
The owners of a company are...
Managers
Employees
Shareholders
The president director
Preferred stock has characteristics similar to...
Bonds
Common stock
Derivatives
Bank deposits
The basic NPV formula is...
PV − Cost
PV + Cost
IRR × Cost
Cash flow ÷ Cost
A project is accepted if its NPV is...
Negative
Zero
Greater than zero
Less than IRR
An advantage of IRR is that it is...
Easy to compare across projects
Does not require a cost of capital
Never creates conflicting decisions
Not sensitive to cash flows
The payback method ignores...
Risk
Initial cash flow
Time value of money
Payback period
If the payback period is longer than the company’s cutoff, the project should be...
Accepted
Postponed
Rejected
Re-evaluated using IRR
Discounted payback is better than simple payback because it...
Ignores risk
Uses the time value of money
Requires shorter calculations
Does not need a discount rate
Ranking conflicts between NPV and IRR usually occur in...
Independent projects
Projects with conventional cash flows
Mutually exclusive projects
Short-term projects
Profitability Index equals...
PV + Cost
Cost + PV
PV × Cost
PV − Cost
If PI > 1, it means...
NPV is positive
IRR is negative
The project is rejected
Cash flows are uncertain
IRR is...
The discount rate that makes NPV = 0
Future cash flows
The minimum cost of capital
A profitability ratio
If two projects are mutually exclusive, the one chosen should have the...
Largest PI
Fastest payback
Largest NPV
Largest IRR
NPV sensitivity can be analyzed through...
Payback
Scenario analysis
Depreciation expense
Income statement
If the discount rate increases, NPV will...
Increase
Decrease
Stay the same
Be unaffected
A project with nonconventional cash flows can produce...
Multiple IRRs
A negative PI
A constant NPV
A faster payback
IRR can be misleading if a project has...
Conventional cash flows
Small initial cost
Many sign changes in cash flows
A low discount rate
If NPV = 0, the project...
Generates a return equal to the cost of capital
Harms the company
Is assumed to be accepted
Generates no cash flows
A weakness of the PI is that it is...
Not using the time value of money
Not suitable for mutually exclusive projects
Ignoring terminal cash flows
Producing many IRR values
Payback does not take into account...
Time
Cash flows
Risk
Cash flows after the payback period
Capital budgeting is primarily used for...
Long-term projects
Working capital management
Issuing stock
Tax management
If IRR > cost of capital, then the project is...
NPV negative
Feasible
Cash flows are too small
Rejected
Relevant cash flow is
A sunk cost
An opportunity cost
Historical depreciation
Loan interest
A sunk cost is a cost that
Cannot be changed
Is influenced by the project decision
Must be included in the analysis
Will occur in the future
A project side effect can be
Erosion (cannibalization)
Depreciation
Deferred tax
Long‑term debt
Opportunity cost arises because
Assets have alternative value
Taxes increase
Depreciation grows
Cash flow changes
Working capital will return in
The first year
The final year of the project
The second year
Never
The benefit of depreciation is
A reduction in cash flow
A reduction in taxes
An increase in profit
An increase in debt
Terminal cash flow includes
Sunk cost
Salvage value
Marketing cost
Production cost
Capital budgeting is based on
Cash flow
Net income
Dividends
Stock price
Interest expense is excluded from project cash flow because it is
Not relevant
Already captured in the cost of capital
Not reducing taxes
Not affecting NPV
Incremental cash flow is
The firm’s total cash flow
The cash flow that changes due to the project
Gross profit
Short‑term cash flow
A tax shield comes from
Depreciation
Sales
Debt
Amortization only
If an asset is sold above book value, there will be
No tax
A capital gains tax
Higher depreciation
An increase in working capital
Operating cash flow is calculated as
EBIT + Taxes
EBIT × Taxes
EBIT − Taxes
EBIT + Depreciation − Taxes
Working capital includes
Fixed assets
Current assets minus current liabilities
Equity capital
Long‑term debt
An example of a sunk cost is
Previous research expenditure
Future marketing expense
Production cost
Erosion occurs when a new project affects existing products. When does erosion happen?
A new project increases sales
A new project reduces sales of an existing product
An old project becomes inefficient
Cash flow becomes stagnant
Project analysis does not use accounting profit because it fails to represent a key measure. Why is accounting profit not used?
It is too complicated
It focuses more on market value
It does not reflect cash flow
Taxes are too large
Capital expenditures are recorded as what?
Direct cash expenses
Long‑term investments
Interest expenses
Revenue
At the start of a project, a change in net working capital (NWC) is treated as what?
An outflow
An inflow
Not recorded
A reduction in capital
Opportunity costs must be included because they represent what?
No effect
The value of a foregone alternative
Unmeasured items
No cash flow generated
Sensitivity analysis is conducted by doing what?
Changing all variables at once
Changing one variable at a time
Changing only the discount rate
Adding fixed cost
Scenario analysis considers what?
Random variables
Multiple variable changes simultaneously
Changes in depreciation only
Risk shifting
Break‑even analysis seeks to find what?
The point where NPV is zero
The maximum IRR point
The minimum sales level for profit to equal 0
The point where cash flow is most negative
The Degree of Operating Leverage (DOL) indicates what?
The sensitivity of EBIT to changes in volume
The sensitivity of cash flow to taxes
The company’s total debt
Depreciation expense
As DOL increases, what happens?
Operational risk increases
Risk decreases
Profit becomes stable
Stock price becomes stable
Project risk increases when which condition holds?
Cash flow variance is small
Fixed costs are low
Cash flows are more uncertain
Sales are stable
Monte Carlo simulation is used to do what?
Eliminate risk
Increase risk
Generate probabilistic distributions
Calculate depreciation
Negative operating cash flow can cause what?
IRR to increase
The project to be halted
Depreciation to rise
Taxes to fall
The basic risk of a project is what?
Company‑specific risk
Market risk
Systematic risk
The inherent risk of the project
Sensitivity analysis helps reveal what?
The most influential variable
Stock market values
The inflation rate
The cost of raw materials
If a project is highly sensitive to the selling price, what does that imply?
Selling price is unimportant
Risk is low
Small price changes greatly affect NPV
IRR remains constant
Financial break‑even occurs when which condition holds?
Net income equals 0
NPV equals 0
Cash flow equals 0
EBIT equals 0
Sensitivity analysis does not show which of the following?
The range of outcomes
Critical variables
Uncertainty across many variables
The effect of a single variable
If cash flow variance is high, what does that indicate?
A safe project
High risk
NPV will surely rise
Low sensitivity
Project evaluation aims to do what?
Increase debt
Reduce taxes
Measure economic feasibility
Expand assets
Scenario analysis typically consists of which set of cases?
Best–worst–most likely
Best–expected
Worst–NPV
Profit–loss
In sensitivity analysis, the variable most often tested is
Selling price
Director’s salary
Future tax expense
Interest expense
If cash flow is deterministic, then
Risk is zero
Risk is high
IRR is negative
NPV is not valid
Project evaluation considers
Risk
Cash flow
Time value of money
All of the above
A company’s operations with large fixed costs tend to have
Low risk
High risk
Profits that are certainly stable
No leverage
Cost of capital is
An operating cost
The cost of obtaining funds
Retained earnings
The product’s selling price
WACC accounts for
Only debt
Only equity
All sources of financing
Cash and cash equivalents
Cost of debt is calculated from
Nominal interest
After‑tax interest
Dividends
Net income
The cost of equity can be estimated using the model
CAPM
Payback
IRR
Break‑even
CAPM considers the following factors, except
Beta
Risk‑free rate
Market risk premium
Dividends
If beta increases, the cost of equity
Decreases
Increases
Remains constant
Does not change
Taxes make the cost of debt
Higher
Lower
Unchanged
Irrelevant
The optimal capital structure is
Maximum debt
Maximum equity
A combination that minimizes WACC
A combination that maximizes risk
The cost of preferred stock is computed as
Dividend divided by price
Price divided by dividend
Interest plus price
Beta times dividend
WACC is used for
Project evaluation
Depreciation calculation
Operational control
Share issuance
If the proportion of debt increases, the WACC will…
Always decrease
Always increase
Decrease first and then increase
Remain unchanged
Beta measures…
Unsystematic risk
Systematic risk
Total risk
Tax risk
The most expensive source of financing is…
Debt
Preferred stock
Common stock
Bonds
If a firm uses more debt, then…
Equity risk increases
Equity risk decreases
Equity beta decreases
Cost of debt increases
WACC increases when…
Cost of equity decreases
Cost of debt decreases
The proportion of expensive financing increases
The proportion of debt increases
Financial leverage is the use of…
Current assets
Debt to enhance returns
New shares
Depreciation
Trade-off theory states that a firm chooses its capital structure with…
Zero debt
An optimum between the tax benefits of debt and bankruptcy costs
Maximum debt
Maximum equity
Pecking order theory states that firms prefer funding from…
Debt first
Equity first
Internal funds first
Preferred stock first
Financial distress occurs when…
Profit increases
Debt is too high
Liquidity increases
Taxes decrease
If leverage increases, EPS becomes…
Always lower
Constant
More sensitive to EBIT
Unchanged
A high debt-to-equity ratio indicates…
Low risk
High risk
Large equity
No debt
Debt provides the benefit of…
Interest expense
Tax shield
Market risk
High beta
If the industry is very risky, the appropriate capital structure is…
High debt
Low debt
Zero debt
Zero equity
A company with stable cash flows tends to…
Use more debt
Avoid debt
Pay smaller dividends
Never issue shares
The goal of an optimal capital structure is to…
Increase the interest burden
Reduce profit
Minimize WACC and maximize firm value
Reduce the stock price
