Corporate Finance Governance Quiz

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Questions and Answers

Match the finance concepts with their definitions:

Capital Budgeting = Process of selecting and accepting investment projects Capital Structure = Choice of financial mix (debt versus equity) Net Working Capital = Management of short-term cash flows Cash Management = Handling timing mismatches of cash inflows and outflows

Match the financial terms with their descriptions:

ROCE = Return on Capital Employed NOPAT = Net Operating Profit After Tax Operating Profit Rate = Profitability measure based on sales after investment Cash Flow = Net amount of cash being received and paid out

Match the financial statements to their characteristics:

Cash Flow Statement = Reflects real payments made Income Statement = Documents all payments (including non-cash items) Depreciation = Non-financial section of income statement Cash Flow Analysis = Central to understanding shareholder value creation

Match the components of capital structure with their types:

Debt = Borrowed funds with a repayment obligation Equity = Ownership financing through stock Bondholders = Creditors who provide debt financing Shareholders = Investors providing equity financing Signup and view all the answers

Match the purpose of cash flow with its significance:

Pay Dividends = Return on investment to shareholders Repay Principals = Timely settlement of debt obligations Increase Operating Assets = Invest in business growth Ensure Remuneration = Compensate investors for risk assumed Signup and view all the answers

Match the terms related to financial management with their focus areas:

Capital Budgeting = Investment project selection Capital Structure = Financial resource allocation Cash Management = Short-term liquidity management Cash Flow Analysis = Assessment of cash availability Signup and view all the answers

Match the financial ratios with their relevance:

ROCE = Comparison between return and cost of capital Operating Profit Rate = Measure profitability from sales NOPAT = Profit measurement after tax Cash Flow = Indicator of financial health and liquidity Signup and view all the answers

Match the aspects of cash flow with their impacts on business:

Cash Inflows = Money received from operations or sales Cash Outflows = Payments made for expenses or investments Net Cash Flow = Difference between inflows and outflows Cash Flow Timing = Impact on liquidity and operations Signup and view all the answers

Match the following terms with their definitions:

Average Return = The mean annual return an investor could expect over a specific period Beta Coefficient = A measure of the risk of a stock in relation to the market WACC = The average cost of capital from both equity and debt financing Risk Premium = The additional return expected for taking on additional risk Signup and view all the answers

Match the following formulas with their descriptions:

CAPM = A model used to determine the cost of equity based on risk WACC Formula = The formula to calculate the average cost of capital Return Formula = The formula for calculating average stock return Risk-adjusted Return = Expected return adjusted for the level of risk taken Signup and view all the answers

Match the following components of WACC with their values:

Equity Financing = 100/400 Debt Financing = 300/400 Cost of Equity = 10.5% After-tax Cost of Debt = 2.6% Signup and view all the answers

Match the following investment concepts with their implications:

Time Value of Money = A principle stating that cash flows today are worth more than future cash flows Risk and Return = Higher risk investments require a higher expected return Cost of Equity = The return required by shareholders for their investment Investment Decision = The process of comparing current cash flows with future cash flows Signup and view all the answers

Match the following stock return periods with their average return values:

1926-2002 = 12.2% Present Day = Variable based on market conditions Short-term = Often lower than long-term average returns Long-term = Typically higher average returns than short-term Signup and view all the answers

Match the following investor types with their characteristics:

Risk-averse Investor = Prefers lower risk investments with stable returns Risk-seeking Investor = Willing to take on high risk for potentially high returns Conservative Investor = Focuses on preservation of capital Aggressive Investor = Targets high growth by investing in volatile stocks Signup and view all the answers

Match the following elements of the Capital Asset Pricing Model (CAPM) with their meanings:

Rf = Risk-free rate of return Rm = Expected market return Beta = Sensitivity of an asset to movements in the overall market Risk Premium = Expected return above the risk-free rate Signup and view all the answers

Match the following types of financial returns with their characteristics:

Nominal Return = Return before adjusting for inflation Real Return = Return adjusted for inflation Expected Return = The return anticipated based on historical performance Annualized Return = Return expressed as if it were earned over a year Signup and view all the answers

Match the following cash-flows with their correct classification according to NPV methodology:

Incremental cash-flows = Only use these when calculating NPV Opportunity costs = Consider these as costs if they result from asset sale Sunk costs = Ignore these in NPV calculations Allocated costs = Exclude unless they are incremental to the project Signup and view all the answers

Match the cash flow amounts with their present value calculations for the year 2020:

800 = $727 850 = $702 950 = $713 1075 = $734 Signup and view all the answers

Match the investment outcomes with their corresponding NPV decisions:

Both projects A and B negative NPV = Reject both projects At least one project has positive NPV = Accept the one with highest NPV NPV of -$2609.4 = Should not invest in the project NPV of $138 = Accept the project Signup and view all the answers

Match the cash flows with the years they occur for the project with an investment of $10,000:

Year 1 = $500 Year 2 = $1500 Year 3 = $10,000 Year 0 = -$10,000 Signup and view all the answers

Match the cash flow sum with the corresponding total amounts:

Sum of cash flow = $12,000 Sum of present value = $7,390.5 Initial investment = $10,000 NPV = -$2,609.4 Signup and view all the answers

Match the terms with their explanations in financial analysis:

NPV = The difference between present value of cash inflows and outflows Opportunity costs = Costs associated with lost revenue from asset sale Sunk costs = Costs already incurred and irreversible Incremental cash-flows = Cash-flows directly resulting from accepting a project Signup and view all the answers

Match the present value of cash flows to their corresponding years:

Year 2018 = $727 Year 2019 = $702 Year 2020 = $713 Year 2021 = $734 Signup and view all the answers

Match the components of NPV with their descriptions:

PV of cash flows = The sum of all discounted future cash inflows Initial investment = The amount of capital invested at the start Positive NPV = Indicates a profitable project Negative NPV = Indicates an unprofitable project Signup and view all the answers

Match the following financial terms with their definitions:

Net Present Value (NPV) = The difference between the present value of cash inflows and outflows Internal Rate of Return (IRR) = The discount rate that makes the NPV of a project zero Present Value (PV) = The current worth of a future sum of money Cash Flow = The total amount of money being transferred into and out of a business Signup and view all the answers

Match the following scenarios with their respective NPV results:

Project A = NPV = 135.5, should invest Comfy Hotel Upgrade = NPV = 30,381, should invest Gold Mine Investment = NPV = 26.9, should invest Non-investment Scenario = NPV < 0, do not invest Signup and view all the answers

Match the following formulas with their respective financial concepts:

FV = PV*(1+r)^n = Future Value PV = FV*(1+r)^-n = Present Value NPV = Sum of Cash Flows = Net Present Value PV = Cash Flow / r*(1-1/(1+r)^n) = Present Value of Annuity Signup and view all the answers

Match the cash flow amount with its corresponding present value calculation:

500 = PV = 500 / 1.02 1,500 = PV = 1,500 / (1.02)^2 10,000 = PV = 10,000 / (1.02)^10 27,500 = PV = 27,500 / 0.12 Signup and view all the answers

Match the investment duration with the project it relates to:

Gold Mine = 5 years Comfy Hotel Upgrade = 10 years Initial Cash Flow Analysis = 10 years Quick Investment Project = 1 year Signup and view all the answers

Match the following financial calculations with their outcomes:

FV=20001,04^10 = 2960,49 € PV=20001,08^-10 = 926,37 € PV=5000000*(1,02)^-27 = 2,929,310,22 € PV=10,000,000*1,1^-5 = 12,418,426,46 € Signup and view all the answers

Match the following investment rules with their descriptions:

NPV > 0 = Accept the project NPV < 0 = Reject the project PV of revenues > PV of costs = Investment is favorable PV of revenues < PV of costs = Investment is unfavorable Signup and view all the answers

Match each project with its respective discount rate:

Comfy Hotel = 12% Gold Mine = 10% Initial Cash Flow = 2% General Projects = Assumed rate of 10% Signup and view all the answers

Match the following returns with their percentages:

R=80,000/10,000^(1/12)-1 = 18,9 % R=(45560/25500)^(1/10)-1 = 5,97 % R=1,04^10-1 = 40,74 % R=1,1^7-1 = 15,87 % Signup and view all the answers

Match the cash inflow with the corresponding operation cost:

Gold Mine Revenue = $30 million Gold Mine Operations = $10 million Comfy Upgrade Profit = €15,000 Comfy Depreciation = €12,500 Signup and view all the answers

Match each project with its initial investment amount:

Gold Mine = $50 million Comfy Hotel Upgrade = €125,000 Project A = $100 General Financial Project = $10,000 Signup and view all the answers

Match the cash flow terms with their definitions:

Cash Flow = Inflow and outflow of cash from a project Net Present Value (NPV) = Difference between present value of cash inflows and outflows Discount Rate = Rate of return used to discount future cash flows Internal Rate of Return (IRR) = Rate at which NPV of cash flows equals zero Signup and view all the answers

Match the following financial calculations with their specific outputs:

Total Cash Flow for Comfy Hotel = 275,000 PV of Comfy Hotel Upgrade = 155,381.13 Total PV Calculation = 10,135.5 NPV of Gold Mine = 26.9 Signup and view all the answers

Match the following investment scenarios with decisions to be made:

Investing in a project with NPV > 0 = Should invest Accepting cash now instead of later = Prefer immediate cash Paying 5 million in future vs. present investment = Calculate present value needed Evaluating machine benefits vs costs = Analyze cash flows for feasibility Signup and view all the answers

Match the following variables in the Time Value of Money formulas:

PV = Present Value FV = Future Value r = Interest Rate n = Number of periods Signup and view all the answers

Match the financial metrics with their definitions:

IRR = Internal Rate of Return NPV = Net Present Value D/E = Debt-to-Equity Ratio D / (D+E) = Debt Ratio Signup and view all the answers

Match the decision rules to the respective financial evaluation method:

Payback Period = Accept all projects with a PP before the cut-off date Profitability Index = Accept independent projects if PI > 1 NPV = Always prefer over IRR for mutually exclusive projects IRR = Must be superior to WACC for investment Signup and view all the answers

Match the financial concepts with their preferred usage context:

Market Values = Reflects true current value of debt and equity Book Values = Preferred by investors and credit rating firms Capital Rationing = Prefer PI-rules for non-mutually exclusive projects Contractual Obligations = Debt repayments pressures the firm Signup and view all the answers

Match the problem types to their descriptions:

Mutually Exclusive Projects = May lead to different decisions between IRR and NPV Negative Cash Flows = Cannot use IRR Cut-off date = Specific deadline in Payback Period method Tax Benefits = Debt provides potential tax reductions Signup and view all the answers

Match the financial concepts to their formulas or ratios:

Profitability Index = NPV / Initial Investment NPV greater than 0 = Invest if IRR is superior to WACC Debt Ratio = D / (D+E) Payback Period = Time taken to recover investment Signup and view all the answers

Match the financial principles to their evaluation criteria:

IRR superior to WACC = Investment decision is to invest NPV negative = Do not invest Quickest Payback Period = Choice for mutually exclusive projects Sensitivity to Volatility = Concern for Market Values Signup and view all the answers

Match the financial evaluation methods to their advantages:

IRR = Focus on rate of return NPV = Shows value added to firm PI = Ranks projects based on value yielded per unit invested Payback Period = Simplicity and quick recovery indication Signup and view all the answers

Match each term with its appropriate description:

Debt = Provides tax benefits Equity = Represents ownership in a company Cut-off date = Defines time limit for Payback Period analysis WACC = Weighted Average Cost of Capital Signup and view all the answers

What term is used to describe the process of selecting and accepting an investment project?

Capital Budgeting Signup and view all the answers

What is meant by capital structure in financial management?

The choice of financial mix of debt versus equity Signup and view all the answers

How is return on capital employed (ROCE) primarily used in finance?

To assess value creation for shareholders Signup and view all the answers

What is a key difference between cash flow and income statements?

Cash flow reflects actual cash movements, while income statements may include non-cash items. Signup and view all the answers

What purpose does cash flow analysis serve in relation to shareholders?

To ensure adequate remuneration for investment risk Signup and view all the answers

What does NOPAT stand for in financial calculations?

Net Operating Profit After Tax Signup and view all the answers

Which of the following is primarily focused on managing short-term cash flows?

Cash Management Signup and view all the answers

Why is cash flow considered central to finance?

It allows for the payment of dividends and management of operating assets. Signup and view all the answers

Which cash flow should be included when calculating the NPV of a project?

Incremental cash flows Signup and view all the answers

What should be considered as a cost when deciding to use an asset in a new project?

Opportunity costs Signup and view all the answers

When comparing two mutually exclusive projects using NPV, what decision should be made if both projects have a negative NPV?

Reject both projects Signup and view all the answers

In the NPV calculation, which of the following should be excluded?

Sunk costs Signup and view all the answers

How is the NPV determined when calculating cash flows over multiple years?

By discounting future cash flows and subtracting initial investment Signup and view all the answers

Which investment opportunity should be avoided based on the NPV rule?

A project with a negative NPV Signup and view all the answers

What is the first step to take when evaluating two potential projects?

Calculate the NPV for both projects Signup and view all the answers

If the sum of discounted cash flows is $7,390.5 and the initial investment is $10,000, what is the NPV?

$-2,609.4 Signup and view all the answers

What is the effective interest rate for Investment B if the stated interest rate is 9.85% compounded monthly?

10.31% Signup and view all the answers

Which of the following formulas correctly calculates the present value of a growing perpetuity?

PV = C / (r - g) Signup and view all the answers

What is the Future Value of an investment of €10,000 at an interest rate of 12% after one year?

€11,200 Signup and view all the answers

How is the effective annual interest rate defined?

An equivalent effective annual rate for an investment compounded once a year. Signup and view all the answers

For the perpetual bond paying €50 annually with a market interest rate of 10%, what would be its present value?

€500 Signup and view all the answers

What formula is used to calculate Future Value over multiple periods?

FV = PV * (1 + R) ^ n Signup and view all the answers

What is the purpose of the present value of annuity formula in investment calculations?

To estimate an investment's current worth based on future cash flows Signup and view all the answers

If you invest €1,000 at a semi-annual interest rate of 10%, what will be your wealth at the end of the first year?

€1,102.50 Signup and view all the answers

How do you calculate the future value of an annuity when investing €1,000 per year at an interest rate of 5% for 3 years?

€3,157.63 Signup and view all the answers

What is the Present Value if the cash inflow is €11,424 to be received in one year with a discount rate of 12%?

€10,000 Signup and view all the answers

In which situation would you apply the formula for perpetuity?

When evaluating a long-term investment that pays constant cash indefinitely Signup and view all the answers

What is the result of investing $1,000 at an annual interest rate of 10.71% compounded annually for 76 years?

$2,281,395 Signup and view all the answers

When considering cash inflows, what does the term 'cash outflows' refer to?

The costs incurred in making an investment. Signup and view all the answers

If €50 is paid annually forever and the market interest rate is 5%, what is the present value of this cash flow?

€1,000 Signup and view all the answers

What can be concluded when comparing multiple investment products with different compounding periods?

Effective interest rates allow for a fair comparison of returns. Signup and view all the answers

What is the main purpose of an indenture or prospectus in a loan agreement?

To set terms such as maturity date and repayment schedule Signup and view all the answers

Which of the following is NOT typically included in loan amortization calculations?

Borrower's personal background Signup and view all the answers

What type of loan payment structure involves a change in interest amount with each payment?

Equal principal payments Signup and view all the answers

What does ESG stand for in the context of company performance measurement?

Environmental, Social, and Governance Signup and view all the answers

What role does self-reporting play in ESG performance measures?

It allows management to selectively highlight strengths Signup and view all the answers

Which of the following is an example of a restriction that may be included in covenants?

Maximum level of Working Capital Requirement Signup and view all the answers

In calculating the ending balance of an amortized loan, what component is subtracted from the beginning balance?

Principal amount paid Signup and view all the answers

What consequence can arise during a shareholders meeting when questions are raised regarding a company's ESG performance?

Disputes over management's self-reported data Signup and view all the answers

What should be preferred when dealing with mutually exclusive projects if IRR and NPV suggest different decisions?

Always choose NPV Signup and view all the answers

Which statement is true regarding the Profitability Index (PI) when evaluating mutually exclusive projects?

Use NPV-rules for mutually exclusive projects Signup and view all the answers

Under which condition should an independent project based on Profitability Index (PI) be accepted?

If PI is greater than 1 Signup and view all the answers

What is a key disadvantage of using IRR when dealing with projects that involve negative cash flows?

It does not provide a unique solution Signup and view all the answers

Which of the following is a primary rule for the Payback Period (PP) method regarding project selection?

Select projects with a PP before a defined cut-off date Signup and view all the answers

What is a major issue with using book value versus market value when assessing capital structure?

Book value is preferred for contractual obligations Signup and view all the answers

When utilizing the trade-off model, what advantage does debt offer to a firm?

Debt affords tax benefits to the firm Signup and view all the answers

What is the primary function of the Debt-to-Equity Ratio in capital structure analysis?

To indicate the proportion of debt versus equity financing Signup and view all the answers

Study Notes