1. Which of the following represents the primary goal of financial management for a
corporation?
a. Maximizing sales
b. Minimizing expenses
c. Maximizing shareholder wealth
d. Maximizing employee satisfaction
**Answer: c**
2. What is the term for the cost of capital that represents the required return for a firm's
investors?
a. Weighted Average Cost of Capital (WACC)
b. Return on Investment (ROI)
c. Internal Rate of Return (IRR)
d. Dividend Yield
2
, **Answer: a**
3. If a company's current ratio is 2.5, which of the following statements is true?
a. The company is highly liquid.
b. The company may face liquidity issues.
c. The company is not profitable.
d. The company has a low debt-to-equity ratio.
**Answer: a**
**Section B: Short Answer Questions (20 marks)**
4. Define the term "Capital Budgeting" and explain its importance in corporate finance.
**Answer:** Capital budgeting is the process of evaluating and selecting long-term
investment projects that are expected to generate cash flows over an extended period.
It involves assessing the feasibility and profitability of potential investments to determine
which projects to undertake. Capital budgeting is essential in corporate finance because
it helps a company allocate its resources wisely, make informed investment decisions,
and maximize shareholder wealth by choosing projects that generate the highest
returns.
5. Differentiate between equity financing and debt financing. Provide an example of
each.
**Answer:** Equity financing involves raising capital by issuing shares of ownership in
the company, such as common or preferred stock. Equity investors become
shareholders and have ownership rights, but the company doesn't have a legal
obligation to repay the capital. An example of equity financing is a company issuing new
shares of common stock to raise funds.
Debt financing, on the other hand, involves raising capital by borrowing money
through loans, bonds, or other debt instruments. The company is obligated to repay the
borrowed funds, typically with interest. An example of debt financing is a company
taking out a bank loan to expand its operations.
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