(Value and Valuation) Which method is most appropriate for valuing a company with

unpredictable cash flows?

a) Comparable Companies Analysis
b) Precedent Transactions
c) Discounted Cash Flow
d) Asset-Based Valuation
Correct Answer: c) Discounted Cash Flow

(ROIC) ROIC is used to:

a) Determine dividend payouts
b) Measure a company's investment efficiency
c) Calculate earnings per share
d) Assess credit risk
Correct Answer: b) Measure a company's investment efficiency

(Growth Analysis) Sustainable growth rate is:

a) Directly related to dividend policy
b) The maximum growth rate achievable without external financing
c) Only relevant for high-tech industries
d) Determined primarily by market trends
Correct Answer: b) The maximum growth rate achievable without external financing

(Enterprise DCF) In a DCF model, the terminal value represents:

a) The value of cash flows during the explicit forecast period
b) The value of the company at the end of the forecast period
c) The salvage value of the company's assets
d) The company's market capitalization at the start of the forecast period
Correct Answer: b) The value of the company at the end of the forecast period

(Economic Profit) Economic profit differs from accounting profit in that it:
a) Includes non-cash expenses
b) Excludes interest expense
c) Considers opportunity costs
d) Is based on tax-adjusted figures
Correct Answer: c) Considers opportunity costs

(Financial Statements) The primary purpose of the cash flow statement is to:
a) Show the company's profitability
b) Reveal the company's investment activities
c) Provide details on how cash is generated and used
d) Display the company's equity structure
Correct Answer: c) Provide details on how cash is generated and used

(Performance Evaluation) A high Earnings Before Interest and Taxes (EBIT) margin
indicates:
a) Lower tax liabilities
b) Higher operational efficiency
c) Greater leverage
d) Increased dividend potential
Correct Answer: b) Higher operational efficiency
(Value and Valuation) A company's intrinsic value is best described as:
a) Its current stock market price
b) The present value of its future cash flows
c) Its book value
d) The replacement cost of its assets
Correct Answer: b) The present value of its future cash flows

(ROIC) A decline in ROIC over time can be indicative of:

a) Improved market share
b) Decreased competitive advantage
c) Increased dividend payouts
d) Lower interest rates
Correct Answer: b) Decreased competitive advantage

(Growth Analysis) The retention ratio is important for growth analysis because it indicates:
a) How much profit is reinvested in the business
b) The company's dividend payout policy
c) Market share growth
d) Debt repayment capability
Correct Answer: a) How much profit is reinvested in the business

(Enterprise DCF) The cost of capital in a DCF model is used to:

a) Calculate dividends
b) Determine the discount rate for future cash flows
c) Assess the company's debt level
d) Project future earnings
Correct Answer: b) Determine the discount rate for future cash flows

(Economic Profit) The main difference between NOPAT and net income is that NOPAT:
a) Includes interest expense
b) Excludes taxes
c) Is calculated before interest and taxes
d) Ignores depreciation and amortization
Correct Answer: c) Is calculated before interest and taxes

(Financial Statements) Earnings per Share (EPS) is a critical metric because it:
a) Indicates the company's overall profitability
b) Shows the dividends paid per share
c) Reflects the company's asset base
d) Measures the return on equity
Correct Answer: a) Indicates the company's overall profitability

(Performance Evaluation) When assessing a company's performance, it's important to

compare ROIC to:
a) The company's growth rate
b) The cost of equity
c) The Weighted Average Cost of Capital (WACC)
d) The sector's average P/E ratio
Correct Answer: c) The Weighted Average Cost of Capital (WACC)
(Value and Valuation) In a leveraged buyout analysis, the most critical factor is:
a) The target company's market capitalization
b) The buyer's credit rating
c) The future cash flows of the target company
d) The interest rates on loans
Correct Answer: c) The future cash flows of the target company

(Growth Analysis) Which factor does not directly affect a company's sustainable growth rate?
a) Return on Equity
b) Payout Ratio
c) Cost of Goods Sold
d) Retention Ratio
Correct Answer: c) Cost of Goods Sold

(Enterprise DCF) In calculating terminal value using the Gordon Growth Model, which
assumption is critical?
a) Constant growth rate in perpetuity
b) Increasing cost of capital over time
c) Fluctuating exchange rates
d) Variable depreciation rates
Correct Answer: a) Constant growth rate in perpetuity

(Economic Profit) Economic Value Added (EVA) is most impacted by:

a) Changes in tax regulations
b) Marketing strategies
c) Capital structure decisions
d) Inventory management practices
Correct Answer: c) Capital structure decisions

(Financial Statements) The DuPont analysis primarily helps in understanding:

a) Cash flow trends
b) The impact of leverage on ROE
c) Tax optimization strategies
d) Dividend distribution patterns
Correct Answer: b) The impact of leverage on ROE

(Performance Evaluation) Which is not a common measure in performance evaluation?

a) EBITDA margin
b) PEG ratio
c) Quick ratio
d) Economic profit margin
Correct Answer: c) Quick ratio

(Enterprise DCF) When adjusting cash flows in a DCF model for cyclicality, the best
approach is to:
a) Use average cash flows over a business cycle
b) Focus on peak cash flow years
c) Extrapolate based on current year cash flows
d) Ignore cyclical variations as anomalies
Correct Answer: a) Use average cash flows over a business cycle

(Economic Profit) In calculating EVA, the most appropriate cost of capital to use is:
a) The company's bond yield
b) The industry average WACC
c) The company's specific WACC
d) The historical average return on equity
Correct Answer: c) The company's specific WACC

(Financial Statements) The main limitation of using ROA as a performance metric is that it:
a) Ignores the company's debt structure
b) Is heavily influenced by non-operating income
c) Doesn't account for the age of assets
d) Overemphasizes short-term profitability
Correct Answer: a) Ignores the company's debt structure

(Performance Evaluation) An increase in EBITDA margin without a corresponding increase

in ROIC suggests:
a) Efficient capital utilization
b) Possible overinvestment in non-productive assets
c) Understated operating expenses
d) Improved liquidity position
Correct Answer: b) Possible overinvestment in non-productive assets

(Value and Valuation) The 'exit multiple' method in valuation is most suitable for:
a) Startups with no revenue
b) Mature companies in stable industries
c) Companies in rapidly evolving sectors
d) Businesses with significant intangible assets
Correct Answer: b) Mature companies in stable industries

(ROIC) A significant discrepancy between ROIC and ROE indicates:

a) High operational efficiency
b) Inefficient asset utilization
c) A heavily leveraged capital structure
d) Strong market positioning
Correct Answer: c) A heavily leveraged capital structure

(Growth Analysis) The PEG ratio is flawed because it:

a) Ignores dividend yield
b) Assumes linear growth
c) Is not useful for large-cap stocks
d) Overemphasizes short-term earnings growth
Correct Answer: b) Assumes linear growth

(Enterprise DCF) The most appropriate discount rate to use for an emerging market company
in a DCF model is:
a) The global risk-free rate plus a market risk premium
b) The company's home country risk-free rate plus an adjusted risk premium
c) A fixed standard industry rate
d) The historical average return on equity
Correct Answer: b) The company's home country risk-free rate plus an adjusted risk premium

(Economic Profit) When calculating NOPAT for EVA purposes, it's important to adjust for:
a) Dividend payments
b) Non-operating income and expenses
c) Retained earnings
d) Share repurchase activities
Correct Answer: b) Non-operating income and expenses

(Financial Statements) A limitation of the quick ratio as a liquidity measure is that it:
a) Overemphasizes cash position
b) Doesn't account for the quality of receivables
c) Includes long-term investments
d) Is based on historical cost accounting
Correct Answer: b) Doesn't account for the quality of receivables
ALLT
(Forecasting) A key challenge in financial forecasting is to:
a) Predict exact future market prices
b) Balance historical data with future expectations
c) Focus solely on macroeconomic indicators
d) Use only quantitative methods for accuracy
Correct Answer: b) Balance historical data with future expectations

(Continuing Value) The continuing value in a DCF model is important because:

a) It represents the bulk of the value for many companies
b) It is easier to calculate than annual cash flows
c) It only applies to companies with stable growth
d) It is not influenced by the choice of discount rate
Correct Answer: a) It represents the bulk of the value for many companies

(Cost of Equity) The Capital Asset Pricing Model (CAPM) is used in estimating the cost of
equity to account for:
a) Dividend policy
b) Company-specific risk
c) Market risk premium
d) Historical stock prices
Correct Answer: c) Market risk premium

(Cost of Debt) When assessing the cost of debt, it is crucial to consider:

a) The current dividend yield
b) The tax shield provided by interest expenses
c) The company's return on equity
d) The market capitalization rate
Correct Answer: b) The tax shield provided by interest expenses

(Enterprise vs. Equity Value) When calculating enterprise value, it is important to:
a) Include only tangible assets
b) Add debt and subtract cash and cash equivalents
c) Focus on stock price volatility
d) Consider only equity-related items
Correct Answer: b) Add debt and subtract cash and cash equivalents

(Results Interpretation) In equity valuation, a consistent overvaluation compared to market

price suggests:
a) A potential market inefficiency
b) Accurate market pricing
c) A conservative valuation model
d) Overoptimistic growth assumptions
Correct Answer: d) Overoptimistic growth assumptions

(Multiples Analysis) When using the P/E multiple for valuation, it's important to remember
that:
a) It's less reliable for cyclical companies
b) It's directly linked to dividend payouts
c) It's the only true measure of value
d) It's unaffected by accounting policies
Correct Answer: a) It's less reliable for cyclical companies

(Sensitivity Analysis) In sensitivity analysis, the primary goal is to:

a) Validate the accuracy of the model's assumptions
b) Identify which assumptions have the most impact on valuation
c) Ensure the model is complex and comprehensive
d) Achieve a specific target valuation
Correct Answer: b) Identify which assumptions have the most impact on valuation

(Cost of Equity) A limitation of using the Dividend Discount Model (DDM) for calculating
cost of equity is that it:
a) Assumes constant dividends
b) Is not applicable to non-dividend-paying companies
c) Ignores market risk factors
d) Is too simplistic for complex companies
Correct Answer: b) Is not applicable to non-dividend-paying companies

(Cost of Debt) The effective interest rate on a company's debt often differs from the nominal
rate due to:
a) Fluctuations in market interest rates
b) Changes in the company's credit rating
c) Issuance costs and discounts/premiums on issuance
d) The impact of inflation
Correct Answer: c) Issuance costs and discounts/premiums on issuance

(Forecasting Accuracy) The most significant indicator of a forecasting model's accuracy is:
a) The number of variables included
b) Its consistency with past performance
c) The complexity of the model
d) Alignment with industry benchmarks
Correct Answer: b) Its consistency with past performance

(Continuing Value Challenges) The biggest challenge in estimating continuing value is:
a) Determining the appropriate discount rate
b) Predicting long-term growth rates
c) Estimating terminal cash flows
d) Assessing the impact of inflation
Correct Answer: b) Predicting long-term growth rates

(Cost of Equity in Emerging Markets) When estimating the cost of equity for companies in
emerging markets, a key consideration is:
a) The historical performance of the stock
b) The domestic risk-free rate
c) Country-specific risk premium
d) The global market risk premium
Correct Answer: c) Country-specific risk premium
(Cost of Debt and Company Strategy) A company's strategy impacts its cost of debt primarily
through:
a) The selection of investment projects
b) Dividend payout ratios
c) Market capitalization levels
d) Its credit rating and risk profile
Correct Answer: d) Its credit rating and risk profile

(Valuation Implications of Debt) In valuation, the treatment of debt is critical because:

a) It affects the company's liquidity
b) It influences tax shields
c) It alters the risk profile of the company
d) All of the above
Correct Answer: d) All of the above

(Interpreting Valuation Results) Discrepancies in valuation results are often due to:
a) Different assumptions about growth and risk
b) Inaccurate financial data
c) Inconsistent industry benchmarks
d) The use of different valuation models
Correct Answer: a) Different assumptions about growth and risk

(Multiples Valuation) The use of EBITDA multiples is most appropriate for companies that:
a) Have significant non-cash expenses
b) Are in their early stages of development
c) Have stable and predictable earnings
d) Are capital intensive
Correct Answer: a) Have significant non-cash expenses

(Sensitivity Analysis in DCF) A key purpose of sensitivity analysis in DCF models is to:
a) Ensure precision in cash flow projections
b) Identify the range of possible outcomes
c) Demonstrate the robustness of the model
d) Confirm the accuracy of the terminal value
Correct Answer: b) Identify the range of possible outcomes

(Cost of Equity and Capital Structure) The relationship between a company's capital structure
and its cost of equity is that:
a) Higher debt increases the cost of equity due to increased risk
b) More equity reduces the overall cost of capital
c) A balanced structure leads to lower cost of equity
d) There is no significant relationship
Correct Answer: a) Higher debt increases the cost of equity due to increased risk

(Impact of Interest Rate Changes on Cost of Debt) The cost of debt for a company is most
sensitive to:
a) Changes in the company's operational efficiency
b) Fluctuations in market interest rates
c) The company's dividend policy
d) The CEO's leadership style
Correct Answer: b) Fluctuations in market interest rates

(Forecasting with Non-Financial Indicators) The integration of non-financial indicators in

forecasting is crucial because:
a) They provide insights into market trends
b) They are less volatile than financial metrics
c) They can signal underlying business drivers
d) They simplify the forecasting model
Correct Answer: c) They can signal underlying business drivers

(Challenges in Continuing Value Estimation) In estimating continuing value, the most

overlooked factor is often:
a) The size of the company
b) The industry lifecycle stage
c) Technological advancements
d) Regulatory changes
Correct Answer: b) The industry lifecycle stage

(Cost of Equity for High-Risk Companies) For high-risk companies, a key factor in
determining the cost of equity is:
a) The dividend yield
b) The beta coefficient
c) The current interest rate environment
d) Historical stock volatility
Correct Answer: b) The beta coefficient

(Debt Refinancing Impact on Valuation) When a company refinances its debt, the immediate
impact on valuation is through:
a) Change in tax shields
b) Shift in capital structure
c) Adjustment in cash flow projections
d) Variation in discount rates
Correct Answer: a) Change in tax shields

(Enterprise Value Considerations) In calculating enterprise value, a common mistake is to:

a) Overlook off-balance sheet liabilities
b) Double count equity
c) Ignore cash reserves
d) Misinterpret market capitalization
Correct Answer: a) Overlook off-balance sheet liabilities

(Valuation with Diverse Stakeholders) In valuing a company with diverse stakeholders, it is

important to:
a) Prioritize shareholder interests
b) Balance interests of all stakeholders
c) Focus solely on long-term growth
d) Consider only immediate financial returns
Correct Answer: b) Balance interests of all stakeholders
(Multiples in Different Industries) The applicability of valuation multiples varies greatly
across industries due to:
a) The level of competition
b) Differences in growth rates and risk profiles
c) The size of the companies
d) Regulatory environments
Correct Answer: b) Differences in growth rates and risk profiles

(DCF Model Limitations) One major limitation of DCF models is their:

a) Insensitivity to short-term fluctuations
b) Heavy reliance on long-term forecasts
c) Inability to account for non-financial factors
d) Overemphasis on historical data
Correct Answer: b) Heavy reliance on long-term forecasts

(Equity vs. Asset Beta in Cost of Equity) When comparing equity beta and asset beta in cost
of equity calculations, it is essential to consider:
a) The company's dividend policy
b) The degree of financial leverage
c) The market conditions
d) The operational efficiency
Correct Answer: b) The degree of financial leverage

(Interest Rate Effect on Valuation Models) The most significant impact of changing interest
rates on valuation models is through:
a) Their effect on WACC
b) The alteration of dividend policies
c) Changes in consumer demand
d) Fluctuations in exchange rates
Correct Answer: a) Their effect on WACC
(Impact of Macroeconomic Factors on Forecasting) In equity analysis, macroeconomic
factors:
a) Have negligible impact on forecasting
b) Are crucial for short-term forecasting only
c) Must be integrated for long-term forecasting accuracy
d) Are more important than company-specific factors
Correct Answer: c) Must be integrated for long-term forecasting accuracy

(Terminal Growth Rate Assumptions) In DCF models, an unrealistic terminal growth rate can
lead to:
a) Underestimation of enterprise value
b) Significant overvaluation
c) More accurate valuations
d) Lower sensitivity to WACC changes
Correct Answer: b) Significant overvaluation

(Risk Adjustments in Emerging Markets) When valuing companies in emerging markets, a

common error is:
a) Overestimating political risk
b) Ignoring currency risk
c) Applying developed market benchmarks
d) Underestimating growth potential
Correct Answer: c) Applying developed market benchmarks

(Cost of Debt and Operational Risks) The relationship between a company's operational risk
and its cost of debt is:
a) Inversely proportional
b) Directly proportional
c) Unrelated
d) Only relevant for large corporations
Correct Answer: b) Directly proportional

(Enterprise Value and Non-Operating Assets) In enterprise valuation, proper treatment of

non-operating assets involves:
a) Excluding them entirely
b) Adding them to the final valuation
c) Adjusting the discount rate to account for them
d) Deducting them from total assets
Correct Answer: b) Adding them to the final valuation

(Stakeholder Interests in Valuation) A key aspect in balancing stakeholder interests during

valuation is to:
a) Focus only on short-term profitability
b) Prioritize creditors over equity holders
c) Consider the impact on all stakeholders
d) Value the company solely based on shareholder returns
Correct Answer: c) Consider the impact on all stakeholders

(Industry-Specific Multiples) The selection of valuation multiples must consider:

a) The company's age
b) Industry-specific growth and risk characteristics
c) The CEO's tenure
d) The current stock market trend
Correct Answer: b) Industry-specific growth and risk characteristics

(DCF Sensitivity to Capital Expenditure) The DCF model is particularly sensitive to changes
in:
a) Dividend policies
b) Capital expenditure assumptions
c) Historical earnings
d) CEO compensation
Correct Answer: b) Capital expenditure assumptions

(Beta in Cost of Equity) A higher beta in CAPM generally indicates:

a) Lower risk and lower expected returns
b) Higher risk and higher expected returns
c) Stable dividend payouts
d) Less impact from market volatility
Correct Answer: b) Higher risk and higher expected returns

(Interest Rates and Equity Valuation) Rising interest rates typically lead to:
a) Higher equity valuations
b) Lower equity valuations
c) Unchanged equity valuations
d) More accurate forecasting
Correct Answer: b) Lower equity valuations
A company has an operating income (EBIT) of $120m and a tax rate of 30%. If the invested
capital is $600m and the weighted average cost of capital (WACC) is 10%, what is the
company's economic profit?
a) $12m
b) $18m
c) $24m
d) $30m

When calculating enterprise value, which of the following should be added to equity value?
a) Cash and cash equivalents
b) Minority interest
c) Long-term debt
d) All of the above

A firm with a capital structure consisting of 30% debt and 70% equity has an after-tax cost of
debt of 5% and a cost of equity of 15%. What is the firm's WACC?
a) 6.5%
b) 11%
c) 12%
d) 13%

If a company's NOPAT is expected to grow at a steady rate of 4% annually and its WACC is
8%, what is the continuing value at the end of the forecast period using the perpetuity growth
model?
a) NOPAT / (WACC - growth rate)
b) NOPAT * (1 + growth rate) / WACC
c) NOPAT * (WACC - growth rate)
d) NOPAT / (1 + WACC)

In equity valuation, which of the following statements about the cost of equity is true?
a) It is always higher than the cost of debt
b) It includes a premium for business-specific risks
c) It is independent of the company's financial leverage
d) It is the same as the return on equity

A company's EBITDA is $200m, and its enterprise value is calculated to be $1.6bn. What is
the company's enterprise multiple (EV/EBITDA)?
a) 6x
b) 8x
c) 10x
d) 12x

If a company has a book value of equity of $500m, net income of $50m, and it retains 60% of
its earnings, what is its growth rate assuming a retention growth model?
a) 5%
b) 6%
c) 10%
d) 12%
A firm's balance sheet shows cash of $50m, debt of $200m, and a minority interest of $10m.
What adjustment must be made to the firm's equity value to arrive at its enterprise value?
a) Subtract cash and add debt and minority interest
b) Add cash and subtract debt and minority interest
c) Add cash and debt and subtract minority interest
d) Subtract cash, debt, and minority interest

What is the impact on a firm's WACC if it decides to increase its debt level, assuming the cost
of debt is lower than the cost of equity and the firm is currently below its optimal capital
structure?
a) WACC will increase
b) WACC will decrease
c) WACC will remain unchanged
d) WACC's direction of change is unpredictable

A company's free cash flow to the firm (FCFF) is $150m. If the firm's WACC is 7% and its
long-term growth rate is 3%, what is the present value of its future FCFF using the perpetuity
growth formula?
a) $3,750m
b) $2,142.86m
c) $1,500m
d) $2,500m

A company's return on invested capital (ROIC) is 12%, and its cost of capital is 10%. What
can be inferred about its value creation?
a) Value is being destroyed
b) Value is neutral
c) Value is being created
d) Cannot be determined
Correct Answer: c)

If a firm has a beta of 1.2, the risk-free rate is 3%, and the market risk premium is 7%, what
is its cost of equity using CAPM?
a) 8.4%
b) 11.4%
c) 9%
d) 10%
Correct Answer: b)

When adjusting for country risk in a valuation, which of the following is not typically
considered?
a) Political stability
b) Economic growth
c) Country's credit rating
d) Company's dividend policy
Correct Answer: d)

A company's EBIT is $100m, and it has depreciation expenses of $20m. If the tax rate is
30%, what is its net operating profit after taxes (NOPAT)?
a) $70m
b) $56m
c) $80m
d) $60m
Correct Answer: a)

In the calculation of free cash flow to equity (FCFE), which item is not subtracted from net
income?
a) Capital expenditures
b) Debt repayment
c) Interest expense (after-tax)
d) Increase in working capital
Correct Answer: c)

If a company's weighted average cost of capital (WACC) increases, what is the likely effect
on the enterprise value?
a) Increase
b) Decrease
c) No change
d) Cannot be determined
Correct Answer: b)

A firm's enterprise value is $800m, and its debt is $200m. If the firm has cash of $50m, what
is its equity value?
a) $550m
b) $650m
c) $750m
d) $850m
Correct Answer: b)

Which financial metric is typically used to assess a firm's ability to generate cash flow
relative to its revenue?
a) EBITDA margin
b) Current ratio
c) Debt-to-equity ratio
d) P/E ratio
Correct Answer: a)

What is the impact of an increase in the tax rate on a company's weighted average cost of
capital (WACC)?
a) Increase
b) Decrease
c) No change
d) Depends on the capital structure
Correct Answer: b)

A company with stable and predictable cash flows is best valued using which of the following
methods?
a) Multiples valuation
b) Liquidation valuation
c) Discounted cash flow (DCF) valuation
d) Book value
Correct Answer: c)

For a company with increasing accounts receivable, what impact does this have on its cash
flow from operations?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

A firm's market cap is $500m, it has $50m in debt and $20m in cash. What is its enterprise
value?
a) $530m
b) $480m
c) $520m
d) $470m
Correct Answer: a)

If a company's operating margin is increasing, which of the following may not be a direct
cause?
a) Cost-cutting measures
b) Increased sales volume
c) Decreased tax rate
d) Improved pricing strategy
Correct Answer: c)

When a company repurchases its own shares, what is the expected effect on the share price,
all else being equal?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: a)

Which of the following is not typically included in the calculation of NOPAT?

a) EBIT
b) Tax expense
c) Interest expense
d) Depreciation
Correct Answer: c)

A company's beta is recalculated and found to be lower than previously estimated. What is
the likely impact on the company's cost of equity?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)
In the valuation of a firm, if the risk-free rate decreases, what is the likely impact on the cost
of capital?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

A company has a high return on equity (ROE) but a low return on assets (ROA). What does
this indicate about its financial leverage?
a) High leverage
b) Low leverage
c) No leverage
d) Can vary
Correct Answer: a)

What effect does an increase in the dividend payout ratio have on a company's retained
earnings?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

When considering an investment in a company, which of the following metrics would be least
useful in evaluating its growth potential?
a) P/E ratio
b) Revenue growth rate
c) EBITDA margin
d) Historical stock price performance
Correct Answer: d)

How does a change in inventory levels affect the working capital requirement of a company?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: a)

What is the impact on the cost of debt if a company's credit rating is downgraded?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: a)

Which of these is not a direct input in the calculation of free cash flow to the firm (FCFF)?
a) Net income
b) Capital expenditure
c) Depreciation
d) Change in working capital
Correct Answer: a)

If a company increases its debt ratio, what is the likely impact on its equity beta?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: a)

In a leveraged buyout analysis, what effect does a higher interest rate have on the investor's
expected return?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

When a company issues new equity, what is the expected effect on its earnings per share
(EPS)?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

A company has a PEG ratio lower than 1. What does this suggest about its stock?
a) Overvalued
b) Fairly valued
c) Undervalued
d) Cannot be determined
Correct Answer: c)

What is typically the effect of an increase in interest rates on a company's future cash flows in
a DCF model?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b)

If a company's quick ratio is less than 1, what does this suggest about its liquidity position?
a) Strong liquidity
b) Weak liquidity
c) High solvency
d) Can vary
Correct Answer: b)

What is the effect of a stock dividend on a company's total equity?

a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: c)

Which metric would you use to assess a company’s ability to pay off its short-term liabilities
with its most liquid assets?
a) Current ratio
b) Quick ratio
c) Debt-to-equity ratio
d) Cash ratio
Correct Answer: b) Quick ratio

When a firm's growth rate exceeds its return on new investment, the firm should:
a) Increase investment
b) Maintain investment at current levels
c) Decrease investment
d) Divest
Correct Answer: c) Decrease investment

If a company’s cost of goods sold increases while sales remain constant, what is the expected
impact on gross margin?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

What does a declining debt service coverage ratio indicate about a company's financial
health?
a) Improvement
b) Deterioration
c) Stability
d) Inconsistency
Correct Answer: b) Deterioration

In the event of bankruptcy, which of the following claims is paid first?

a) Subordinated debt
b) Equity holders
c) Secured debt
d) Preferred stock
Correct Answer: c) Secured debt

What is the likely effect on a company’s return on equity if it engages in a share buyback
financed with debt?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: a) Increase

A company's capital expenditure is $10m, depreciation is $5m, and its earnings before
interest and taxes (EBIT) is $20m. If the tax rate is 25%, what is its free cash flow?
a) $13.75m
b) $15m
c) $11.25m
d) $10m
Correct Answer: d) $10m

Which valuation technique uses both market-based multiples and fundamental analysis?
a) Precedent transaction analysis
b) Discounted cash flow (DCF) analysis
c) Comparable company analysis
d) Leveraged buyout (LBO) analysis
Correct Answer: c) Comparable company analysis

A firm's inventory turnover ratio increases. What is the likely impact on the firm's days sales
in inventory?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

How does the issuance of new equity typically affect a company’s earnings per share (EPS)?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

What is the effect of a high receivables turnover ratio on a company's cash cycle?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

If a company has a fixed asset turnover ratio of 5 and net sales of $200m, what is the value of
its fixed assets?
a) $1m
b) $10m
c) $40m
d) Cannot be determined from the given information
Correct Answer: c) $40m
How does an increase in the weighted average cost of capital (WACC) affect the net present
value (NPV) of a project?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

What is the implication of a high current ratio for a company's short-term financial health?
a) Strong
b) Weak
c) Indeterminate
d) Can vary
Correct Answer: a) Strong

If a company's interest coverage ratio is less than 1, what does it suggest about its financial
stability?
a) Strong
b) Weak
c) Neutral
d) Can vary
Correct Answer: b) Weak

In the valuation of a high-tech startup, which factor would typically be given the greatest
weight?
a) Current earnings
b) Historical cash flows
c) Future growth potential
d) Asset value
Correct Answer: c) Future growth potential

A decrease in the dividend payout ratio typically indicates that a company is planning to:
a) Expand its operations
b) Increase its dividend yield
c) Restructure its operations
d) Buy back shares
Correct Answer: a) Expand its operations

If a company's return on assets (ROA) is increasing but its return on equity (ROE) is
decreasing, what can be inferred about its financial leverage?
a) Increasing
b) Decreasing
c) Stable
d) No clear inference can be made
Correct Answer: b) Decreasing

What effect does a stock split have on a company's total market capitalization?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: c) No change

When a company's operating cycle is longer than its payables deferral period, it:
a) Needs more working capital financing
b) Has surplus working capital
c) Is financially efficient
d) Can vary
Correct Answer: a) Needs more working capital financing

Why is EBITDA often used as a measure for comparing companies across different
industries?
a) It eliminates the effects of financing and accounting decisions.
b) It is the same as net income.
c) It provides the most conservative profitability measure.
d) It includes tax effects and interest expenses.
Correct Answer: a)

What is the primary reason a company would prefer equity financing over debt financing?
a) To increase financial leverage.
b) To avoid ownership dilution.
c) To reduce the risk of bankruptcy.
d) Because it is always cheaper.
Correct Answer: c)

How does depreciation affect cash flow from operations in the indirect method of cash flow
statement preparation?
a) It decreases cash flow.
b) It increases cash flow.
c) It has no effect on cash flow.
d) It directly affects net income.
Correct Answer: b)

What is the significance of the PEG ratio in stock valuation?

a) It is used to evaluate the dividend payout.
b) It compares a stock's price relative to its growth rate.
c) It measures the return on investment.
d) It assesses the company’s debt levels.
Correct Answer: b)

Why is it important to analyze a company's cash conversion cycle?

a) It measures the profitability of a company.
b) It indicates the efficiency in managing inventory and receivables.
c) It shows the dividend payout ratio.
d) It reflects the company's share price.
Correct Answer: b)

In corporate finance, what is meant by the term 'capital structure'?

a) The breakdown of a firm's assets and liabilities.
b) The mix of a firm’s long-term debt, specific short-term debt, and equity.
c) The structure of a company’s investments.
d) The organizational structure of the company’s finance department.
Correct Answer: b)

What is the primary disadvantage of using historical cost in financial accounting?

a) It reflects current market value.
b) It may not reflect the true value of an asset due to inflation or changes in market price.
c) It is difficult to calculate.
d) It fluctuates too often.
Correct Answer: b)

What is the main purpose of performing a sensitivity analysis in financial models?

a) To determine the exact future value of the company.
b) To assess the impact of changes in input variables on the outcome.
c) To guarantee that the model is error-free.
d) To satisfy regulatory requirements.
Correct Answer: b)

What does it indicate when a company has a high interest coverage ratio?
a) It is not profitable.
b) It has a high level of debt.
c) It is at a greater risk of defaulting on its debt obligations.
d) It can easily cover interest payments with its current earnings.
Correct Answer: d)

Why might a company with high profitability have low cash flow?
a) It may be investing heavily in long-term assets.
b) High profitability directly increases cash flow.
c) Profitability includes non-cash revenues.
d) All profitable companies have high cash flow.
Correct Answer: a)

If the return on equity (ROE) is 15% and the equity multiplier is 2, what is the return on
assets (ROA)?
a) 7.5%
b) 15%
c) 30%
d) 20%
Correct Answer: a) 7.5%

A project requires an initial investment of $200,000 and is expected to generate annual cash
flows of $50,000 for 6 years. If the required rate of return is 8%, what is the project's Net
Present Value (NPV)?
a) $36,000
b) $48,000
c) $31,144
d) $20,000
Correct Answer: c) $31,144
A company's stock is trading at $40 per share with an EPS of $5. What is the Price-to-
Earnings (P/E) ratio?
a) 6
b) 8
c) 10
d) 12
Correct Answer: b) 8

If a company has an average collection period of 45 days and annual credit sales of
$2,000,000, what is the average accounts receivable balance?
a) $123,287
b) $246,575
c) $150,000
d) $300,000
Correct Answer: b) $246,575

A bond with a face value of $1,000 is issued with a coupon rate of 5% and matures in 10
years. What is the annual coupon payment?
a) $50
b) $500
c) $100
d) $5
Correct Answer: a) $50

A company has a dividend payout ratio of 30% and a dividend per share of $2. What is its
earnings per share (EPS)?
a) $6.67
b) $0.60
c) $5.00
d) $2.30
Correct Answer: a) $6.67

If a company's current ratio is 1.5 and its current liabilities are $100,000, what is the
company's current assets value?
a) $150,000
b) $66,667
c) $100,000
d) $200,000
Correct Answer: a) $150,000

A firm has a debt-to-equity ratio of 0.5. If the total debt is $200,000, what is the total equity?
a) $400,000
b) $100,000
c) $300,000
d) $200,000
Correct Answer: a) $400,000

What is the future value of an investment of $5,000 compounded annually at a rate of 6% for
8 years?
a) $7,966
b) $6,300
c) $5,500
d) $8,000
Correct Answer: a) $7,966

A company has a net income of $100,000, and its weighted average cost of capital (WACC) is
10%. If the company has $500,000 of invested capital, what is its economic value added
(EVA)?
a) $50,000
b) $0
c) -$50,000
d) $10,000
Correct Answer: a) $50,000

What is the effect on net present value (NPV) when the discount rate is adjusted from 5% to
6%?
a) Increase
b) Decrease
c) No change
d) Can vary
Correct Answer: b) Decrease

A company issues a bond at a discount, face value $10,000, with a coupon rate of 7%. What
is the interest expense for the first year?
a) $700
b) Less than $700
c) More than $700
d) Cannot be determined
Correct Answer: c) More than $700

If a stock's earnings yield is 8%, what is the P/E ratio?

a) 8.0
b) 12.5
c) 0.125
d) Cannot be determined
Correct Answer: b) 12.5

Calculate the dividend yield if a company pays an annual dividend of $1.50 per share and the
current stock price is $50.
a) 3%
b) 2%
c) 0.03%
d) 30%
Correct Answer: a) 3%

A company's ROE is 18%. If its equity multiplier is 3, what is its ROA?

a) 6%
b) 18%
c) 54%
d) Cannot be determined
Correct Answer: a) 6%

What is the present value of a $10,000 payment to be received after 5 years if the discount
rate is 7%?
a) $7,129.85
b) $10,000
c) $14,000
d) Cannot be determined
Correct Answer: a) $7,129.85

A firm has an asset turnover ratio of 2 and net sales of $500,000. What is the value of its total
assets?
a) $1,000,000
b) $250,000
c) $500,000
d) Cannot be determined
Correct Answer: b) $250,000

A bond with a coupon rate of 6% pays interest semi-annually. What is the semi-annual
interest payment on a $1,000 bond?
a) $30
b) $60
c) $12
d) Cannot be determined
Correct Answer: a) $30

If a company has a debt ratio of 0.4 and total assets of $2 million, what is its total equity?
a) $800,000
b) $1,200,000
c) $2,400,000
d) Cannot be determined
Correct Answer: b) $1,200,000

A company's stock price increased from $120 to $144 over the past year. What is the stock's
rate of return?
a) 20%
b) 12%
c) 24%
d) Cannot be determined
Correct Answer: a) 20%

What is the payback period for an investment of $50,000 if it generates $10,000 annually?
a) 5 years
b) 10 years
c) Can't be determined
d) None of the above
Correct Answer: a) 5 years

A company's market cap is $100 million, and it has 1 million shares outstanding. What is the
share price?
a) $10
b) $100
c) $1,000
d) None of the above
Correct Answer: b) $100

A firm's current stock price is $50, and it pays a $2 dividend with a growth rate of 3%. What
is its cost of equity?
a) 4%
b) 7%
c) 10%
d) None of the above
Correct Answer: b) 7%

If a company has net operating income of $200,000 and total assets of $1 million, what is its
return on assets (ROA)?
a) 20%
b) 5%
c) 10%
d) None of the above
Correct Answer: a) 20%

A bond with a par value of $1,000 offers a yield to maturity of 6%. What is the price of the
bond if the market interest rate is 5%?
a) $1,000
b) More than $1,000
c) Less than $1,000
d) None of the above
Correct Answer: b) More than $1,000

If a company's quick ratio is 1.2 and its inventory is $20,000, what are its current liabilities?
a) $16,667
b) $24,000
c) $20,000
d) None of the above
Correct Answer: a) $16,667

A firm has a total debt of $500,000 and equity of $1 million. What is its debt-to-equity ratio?
a) 0.5
b) 1
c) 2
d) None of the above
Correct Answer: a) 0.5

A project has an initial outlay of $10,000 and generates cash inflows of $3,000 per year for 5
years. What is the internal rate of return (IRR)?
a) 5%
b) 10%
c) 15%
d) None of the above
Correct Answer: d) None of the above

A company's earnings before interest and taxes (EBIT) is $100,000, interest is $20,000, and
the tax rate is 30%. What is its net income?
a) $80,000
b) $56,000
c) $70,000
d) None of the above
Correct Answer: b) $56,000

A preferred stock pays a $10 annual dividend and the required rate of return is 8%. What is
the value of the preferred stock?
a) $125
b) $80
c) $100
d) None of the above
Correct Answer: a) $125