FI 311 Final Exam Review Questions and Answers | Latest Version | 2024/2025 | Already Passed
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Course
FI 311
Institution
FI 311
FI 311 Final Exam Review Questions and
Answers | Latest Version | 2024/2025 |
Already Passed
How do we calculate a firm's free cash flow?
Free cash flow is calculated as operating cash flow minus capital expenditures.
What does the profitability index indicate in capital budgeting?
...
FI 311 Final Exam Review Questions and
Answers | Latest Version | 2024/2025 |
Already Passed
How do we calculate a firm's free cash flow?
✔✔ Free cash flow is calculated as operating cash flow minus capital expenditures.
What does the profitability index indicate in capital budgeting?
✔✔ The profitability index measures the relative profitability of a project by dividing the present
value of future cash flows by the initial investment.
How does beta measure the risk of a stock?
✔✔ Beta measures a stock’s volatility compared to the market, indicating whether it moves more
or less than the overall market.
What is the significance of the yield to maturity (YTM) on bonds?
✔✔ Yield to maturity is the total return expected on a bond if held until it matures, considering
interest payments and capital gains.
1
,Why is working capital management crucial for day-to-day operations?
✔✔ Proper working capital management ensures a firm has sufficient resources to meet short-
term liabilities and avoid liquidity issues.
How does capital structure affect a firm’s cost of capital?
✔✔ Capital structure influences the weighted average cost of capital, with more debt generally
reducing costs due to tax benefits but increasing financial risk.
What is the difference between operating leverage and financial leverage?
✔✔ Operating leverage relates to a firm’s fixed costs in operations, while financial leverage
relates to the use of debt to finance assets.
How is the break-even point in sales units determined?
✔✔ The break-even point is calculated by dividing fixed costs by the contribution margin per
unit.
What is the role of depreciation in financial statements?
✔✔ Depreciation allocates the cost of an asset over its useful life, affecting both income and tax
calculations without involving cash outflow.
2
,Why is sensitivity analysis important in financial planning?
✔✔ Sensitivity analysis helps evaluate how changes in key assumptions or variables impact a
financial decision, allowing firms to assess risk.
What is the purpose of a pro forma financial statement?
✔✔ A pro forma statement projects future financial performance based on assumptions, helping
firms plan for various scenarios and make informed decisions.
How does a firm’s dividend policy impact investor perception?
✔✔ A stable or growing dividend policy often signals financial strength, attracting investors
seeking reliable returns, while inconsistent policies can raise concerns.
How is the cost of retained earnings calculated?
✔✔ The cost of retained earnings is estimated using the dividend discount model or CAPM to
determine the opportunity cost of reinvesting profits instead of distributing them.
Why is the internal growth rate significant for a firm?
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, ✔✔ The internal growth rate indicates how much a firm can grow using only retained earnings
without needing external financing.
What factors influence a firm's optimal capital structure?
✔✔ Factors include the firm's risk tolerance, cost of debt versus equity, tax considerations, and
industry norms, balancing growth potential with financial stability.
How do changes in interest rates affect bond prices?
✔✔ As interest rates rise, bond prices fall, and vice versa, because the fixed coupon payments
become more or less attractive compared to new issues.
What is the lowest rating a bond can have and still be considered Investment Grade? ✔✔BBB-
Which of the following would be considered an agency problem? ✔✔A salesperson stops
working for the rest of the year when his commission payout for the year is at its limit.
The bonds of Spartan Scooters have a par value of $1000, a current market value of $1200, and
make semiannual coupon payments of $30 each. What is the coupon rate of these bonds?
✔✔6.0%
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