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FINANCE FOUNDATIONS FINAL EXAM QUESTIONS AND ANSWERS -8.
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FINANCE FOUNDATIONS FINAL EXAM QUESTIONS AND ANSWERS -8.
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FINANCE FOUNDATIONS FINAL EXAM QUESTIONS ANDANSWERS #8
In which situation would a company prefer equity financing over debt financing? -
correct answer when a company chooses to have low leverage
You are a small investor with a couple thousand dollars to invest. You are willing to pay
experts to pick stocks for you. Which type of investment are you making? - correct
answer an investment in a managed fund
Why does equity generally cost more than debt financing? - correct answer Lenders
have legal protection, while investors do not.
ABC Corp has a risk-free rate of 5%. If XYZ Inc has an equity risk premium of 6% and a
beta of 1.1, how is the required rate of return for investment in XYZ calculated using
CAPM? - correct answer 5% + (6% x 1.1) = 11.6%
Theoretically, how should a business choose between borrowing and equity in its capital
structure? - correct answer They should choose to borrow, because interest payments
are tax-deductible.
ABC Corp. Has reached $700 million in sales, and wants to buy its competitor XYZ
Corp. As Finance Manager, what should you expect when you approach an investment
bank to help you with the acquisition? - correct answer Someone will underwrite the
transaction involved in purchasing XYZ.
Which two factors are involved in the risk-free interest rate under the Capital Asset
Pricing Model? - correct answer inflation and time-value of money
Why is the "equity risk premium" an important concept to understand in finance? -
correct answer It is the "premium" or extra return offered to accept risk by investing in
stocks.
- correct answer It is part of both long-term and short-term decision-making.
How does "what you need to buy" relate to finance? - correct answer Insurance
companies shift risk from the business to themselves.
Why would a business pay premiums to an insurance company? - correct answer The
assets backing the bonds were not as strong as purchasers expected them to be.
When you are managing receivables, which balance must you establish if you extend
credit to avoid lost opportunities from having insufficient cash? - correct answer You
must balance increased sales with the cost of bad debts and lost use of money.
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