1. Which of the following best describes the concept of "net
present value" (NPV)?
- A) The total revenue generated by a project
- B) The difference between the present value of cash inflows
and outflows
- C) The interest rate at which a project's NPV is zero
- D) The total cost of a project
- ANS: B) The difference between the present value of cash
inflows and outflows
, - Rationale: NPV measures the difference between the
present value of cash inflows and outflows, helping to assess the
profitability of a project.
2. What is the primary purpose of the capital asset pricing model
(CAPM)?
- A) To determine the optimal capital structure
- B) To calculate the expected return on an investment based on
its risk
- C) To forecast future market trends
- D) To evaluate the effectiveness of marketing strategies
- ANS: B) To calculate the expected return on an investment
based on its risk
- Rationale: CAPM is used to determine the expected return
on an investment by considering its risk relative to the market.
, - Rationale: Preferred stock typically offers fixed dividend
payments and has priority over common stock in dividend
distribution.
4. What is the primary difference between debt and equity
financing?
- A) Debt financing involves issuing shares, while equity
financing involves borrowing money
- B) Debt financing requires repayment with interest, while
equity financing does not
- C) Debt financing is riskier for investors, while equity
financing is riskier for the company
- D) Debt financing is only available to large corporations,
while equity financing is available to all businesses
- ANS: B) Debt financing requires repayment with interest,
while equity financing does not
- Rationale: Debt financing involves borrowing money that
must be repaid with interest, while equity financing involves
raising capital by issuing shares without the obligation to repay.
, - C) The calculation of a company's net income
- D) The analysis of a company's market share
- ANS: B) The management of a company's short-term assets
and liabilities
- Rationale: Working capital management involves managing
a company's short-term assets and liabilities to ensure liquidity
and operational efficiency.
Fill-in-the-Blank Questions
6. The __________ is the rate of return required to make a
project or investment worthwhile.
- ANS: discount rate
- Rationale: The discount rate is used to determine the
present value of future cash flows and assess the viability of a
project or investment.
7. A __________ is a financial statement that shows a
company's financial position at a specific point in time.
- ANS: balance sheet
- Rationale: A balance sheet provides a snapshot of a
company's financial position, including its assets, liabilities, and
equity.
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