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Quizzes > Quizzes for Business > Finance

Corporate Finance Assessment Quiz Mastery

Sharpen Your Financial Analysis and Valuation Skills

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art representing a Corporate Finance Assessment Quiz

Step into this Corporate Finance Assessment Quiz to gauge your mastery of capital budgeting, cost of capital, and valuation essentials. Ideal for finance students and professionals seeking a comprehensive financial analysis challenge. Explore deeper insights with our Finance Knowledge Assessment Quiz or tackle tougher scenarios in the Advanced Corporate Finance Quiz. All questions are easily customizable in the built-in editor, allowing you to tailor the experience to your study needs. Don't forget to check out other quizzes for more practice and continued growth.

If a project's internal rate of return (IRR) is 12% and the firm's required rate of return is 10%, what is the correct decision?
Accept the project
Reject the project
Compute the payback period
Request a lower discount rate
When IRR exceeds the required rate of return, the project generates returns above the cost of capital and should be accepted. This decision rule ensures value creation.
A project has a net present value (NPV) of $5,000. What does this indicate?
The project should be rejected
The project breaks even
The project has a negative cash flow
The project adds value and should be accepted
A positive NPV indicates that the present value of cash inflows exceeds the initial investment, meaning the project adds value to the firm. Such projects should be accepted.
What does the weighted average cost of capital (WACC) represent?
The historical average return on investments
The average cost of all financing sources weighted by their market values
The cost of equity only
The cost of debt only
WACC reflects the average rate a firm is expected to pay to finance its assets, weighting each component (debt and equity) by its market proportion. It is used as a hurdle rate for investment decisions.
In the capital asset pricing model (CAPM), beta measures which type of risk?
Systematic risk
Liquidity risk
Total risk
Unsystematic risk
Beta quantifies the sensitivity of an asset's returns to market movements, capturing systematic or market risk. Unsystematic risk is diversified away and not measured by beta.
On a firm's balance sheet, shareholders' equity is calculated as:
Total assets plus total liabilities
Total assets minus total liabilities
Total liabilities minus total equity
Total equity divided by total assets
The basic accounting equation is Assets = Liabilities + Equity, so Equity = Assets minus Liabilities. This reflects residual claim by shareholders.
A firm finances projects with 60% equity at 12% cost and 40% debt at 6% cost. The corporate tax rate is 30%. What is its WACC?
8.9%
6.0%
7.2%
10.2%
WACC = 0.60×12% + 0.40×6%×(1−0.30) = 7.2% + 1.68% = 8.88%, or approximately 8.9%. This weights after-tax debt cost and equity cost.
If the risk-free rate is 3%, the market risk premium is 5%, and a stock has a beta of 1.2, what is its cost of equity according to CAPM?
8%
10%
9%
6%
CAPM: cost of equity = Rf + β×(Market risk premium) = 3% + 1.2×5% = 9%. This captures required return for systematic risk.
A project requires an initial investment of $200 and generates cash flows of $60 for five years. If the discount rate is 7% and the present value annuity factor is 3.803, what is the project's approximate NPV?
$22
$32
$28
$18
PV of inflows = $60×3.803 = $228.18. NPV = $228.18 − $200 = $28.18, approximately $28.
If a firm's total assets are $1,000,000 and its total liabilities are $400,000, what is its debt ratio?
25%
40%
60%
4%
Debt ratio = Total Liabilities / Total Assets = $400,000 / $1,000,000 = 0.4 or 40%. This measures financial leverage.
A company has current assets of $200,000 and current liabilities of $100,000. What is its current ratio?
1.5
0.5
2.0
1.0
Current ratio = Current Assets / Current Liabilities = $200,000 / $100,000 = 2.0. It indicates short-term liquidity.
According to Modigliani-Miller Proposition I (no taxes), how does a firm's capital structure affect its WACC?
It increases WACC as leverage increases
It makes WACC unpredictable
It has no effect on WACC
It decreases WACC as leverage increases
M&M Proposition I states that in perfect capital markets without taxes, the firm's value and WACC are independent of its debt-equity mix.
Which two factors are primary drivers of a firm's valuation in a free cash flow model?
Book value and earnings
Market share and return on equity
Dividend yield and payout ratio
Free cash flow growth and WACC
Firm value in the free cash flow model depends on expected FCFF growth and the discount rate (WACC), which determine the present value of cash flows.
In which cash flow pattern might a project exhibit multiple internal rates of return (IRRs)?
All positive cash flows
Conventional cash flows with one sign change
Non-conventional cash flows with multiple sign changes
No cash flows after initial outlay
Multiple IRRs arise when cash flow signs change more than once, leading to multiple discount rates that satisfy the NPV=0 equation.
Economic Value Added (EVA) is calculated as NOPAT minus:
Market capitalization
Depreciation expense
Total revenues
WACC multiplied by invested capital
EVA = NOPAT − (WACC × Invested Capital). This measures the economic profit generated above the required return.
A high price-to-earnings (P/E) ratio typically signals:
High expected growth rates
Low financial leverage
High dividend payouts
Low market volatility
A high P/E ratio implies investors expect higher future earnings growth, so they are willing to pay more per dollar of current earnings.
Under Modigliani-Miller Proposition II with corporate taxes, how does leverage affect the cost of equity?
ke = k0 − (k0 − kd) × (E/D)
ke remains equal to the unlevered cost of equity
ke = kd − k0 × (1 + Tc)
ke = k0 + (k0 − kd) × (D/E) × (1 − Tc)
With taxes, Proposition II shows the levered cost of equity rises linearly with leverage, adjusted for the tax shield: ke = k0 + (k0 − kd)·(D/E)·(1−Tc).
A firm must raise new equity and incurs flotation costs of 5%. If its required return on equity is 12%, what is the adjusted cost of equity for the project?
13.50%
12.63%
12.00%
11.40%
Adjusted cost = Re / (1 − flotation cost) = 12% / 0.95 = 12.63%. This accounts for reduced net proceeds due to floatation.
Two mutually exclusive projects have the following metrics: Project A NPV = $50 at 10% cost, IRR = 8%; Project B NPV = $45 at 10% cost, IRR = 12%. Which should be chosen?
Neither, both have IRR issues
Project A, because it has the higher NPV
Both, because NPVs are positive
Project B, because it has the higher IRR
For mutually exclusive projects, the NPV rule is superior: Project A adds $50 of value versus $45 for B, so A is preferred at the given cost of capital.
A firm's next-year free cash flow to the firm (FCFF) is $100, and it is expected to grow at 3% indefinitely. If its WACC is 8%, what is the enterprise value?
$2,500
$2,000
$1,000
$1,500
Using the Gordon growth model: EV = FCFF₝ / (WACC − g) = 100 / (0.08 − 0.03) = 100 / 0.05 = $2,000.
If a company issues $1,000,000 of debt at 5% interest and its tax rate is 30%, what is the annual interest tax shield?
$50,000
$5,000
$35,000
$15,000
Annual interest expense = $1,000,000 × 5% = $50,000. Tax shield = Interest × Tc = $50,000 × 0.30 = $15,000.
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Learning Outcomes

  1. Analyse corporate capital structures to identify optimal financing mixes
  2. Evaluate investment projects using net present value and IRR methods
  3. Apply cost of capital concepts to real-world financial scenarios
  4. Interpret financial statements to assess company performance
  5. Demonstrate understanding of risk and return trade-offs
  6. Identify key drivers of shareholder value and firm valuation

Cheat Sheet

  1. Time Value of Money - Think of money today as a turbo-charged snowball: the sooner you invest it, the bigger it grows down the slope of time. This core concept helps you compare what cash is worth today versus in the future. Strategic Corporate Finance: Key Concepts and Techniques
  2. Net Present Value (NPV) - NPV is like a financial report card that tells you if an investment gets an A+ (positive NPV) or flunks (negative NPV). It sums up future cash flows, discounts them to today's value, then subtracts your initial outlay. Corporate Finance ... Formulas CFA® Level 1
  3. Internal Rate of Return (IRR) - IRR is the magic percentage that makes NPV hit zero, showing you the break-even rate of return. Projects boasting an IRR above your required hurdle rate usually earn the green light. Corporate Finance ... Formulas CFA® Level 1
  4. Weighted Average Cost of Capital (WACC) - WACC blends the cost of debt and equity like the ultimate smoothie, revealing how much you pay on average for each dollar of financing. Knowing WACC helps you decide which projects create value and which might leave you chasing your tail. Finance Formulas Made Easy: Cost of Capital Explained
  5. Capital Structure - Picture your firm as a seesaw balanced between debt and equity - finding the sweet spot minimizes costs and maximizes value. Tweaking this mix can turbo-boost returns or trip you up with excess risk. Corporate Finance: Key Concepts and Principles
  6. Financial Statement Analysis - Dive into balance sheets, income statements, and cash flow statements as if they're the company's diary - every number tells a story about performance and health. Mastering these docs equips you to spot trends, strengths, and risks in any business. Strategic Corporate Finance: Key Concepts and Techniques
  7. Risk and Return Trade-off - Remember: chasing big returns is like riding a roller coaster - thrilling but risky. Balancing your risk appetite with expected gains helps tailor investment strategies that won't make you queasy. Corporate Finance: Key Concepts and Principles
  8. Dividend Policies - Dividend policy is your company's game plan for sharing profits: pay out cash, reinvest, or a bit of both? Understanding these choices helps you gauge how a firm values growth versus immediate returns. Corporate Finance: Key Concepts and Principles
  9. Leverage - Using debt can amplify your returns like adding rocket fuel, but too much can send you into a tailspin of risk. Learning the art of leverage lets you boost gains while keeping a safety net intact. Strategic Corporate Finance: Key Concepts and Techniques
  10. Working Capital Management - Treat your cash, inventory, and payables like puzzle pieces - organize them efficiently to keep operations smooth and liquidity healthy. Mastering working capital management means fewer surprises and more runway for growth. Corporate Finance: Key Concepts and Principles
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