Corporate Finance Fundamentals - Intermediate

Question 1
Which component best represents a company's capital structure?

(A) Solely equity financing

(B) Solely long-term debt

(C) A mix of debt and equity financing

(D) A mix of short-term borrowings and lines of credit

Question 2
What does the term 'cost of capital' primarily refer to?

(A) The interest rate on government bonds

(B) The profit margin of its products

(C) The direct expenses incurred during production

(D) The rate a company must pay to finance its assets

Question 3
When evaluating projects using NPV analysis, what assumption can sometimes be unrealistic?

(A) All projects generate identical risk premiums

(B) Future revenue remains constant over time

(C) Cash flows are reinvested at the project's discount rate

(D) Cash flows are reinvested at the internal rate of return (IRR)

Question 4
What is the primary trade-off involved in managing a firm's capital structure?

(A) Prioritizing short-term debt to secure quick funding

(B) Maximizing equity issuance over debt financing

(C) Balancing tax advantages of debt against the financial risk associated with high leverage

(D) Reducing cost of equity regardless of risk premiums

Question 5
Which financing option is typically considered most suitable for long-term expansion projects?

(A) Issuance of corporate bonds

(B) Overdraft facilities

(C) Line of credit arrangements

(D) Short-term bank loans

Question 6
How does financial leverage typically affect a company's return on equity (ROE)?

(A) It always improves equity returns regardless of interest costs

(B) It amplifies ROE when the return on assets exceeds the cost of debt

(C) It has no impact on return on equity

(D) It minimizes risk by diluting earnings volatility

Question 7
What role does market timing play in capital structure decisions?

(A) Firms may choose financing methods based on favorable market conditions

(B) Firms avoid market timing due to its inherent unpredictability

(C) Firms always use retained earnings regardless of market conditions

(D) Market timing does not influence strategic financing decisions

Question 8
Which factor most directly influences a firm's cost of equity?

(A) Its industry's global interest rate environment

(B) The scheduling of its executive meetings

(C) The company's historical dividend payout

(D) The perceived risk of the firm's operations

Question 9
In the context of financing options, what distinctly differentiates a lease from a traditional loan?

(A) A lease requires a full upfront payment similar to a loan

(B) A lease provides the use of an asset without immediate ownership transfer

(C) A lease always results in higher total costs than a loan

(D) A lease eventually results in asset ownership just like a loan

Question 10
How can a company effectively work towards reducing its overall cost of capital?

(A) By substituting long-term funding with short-term securities

(B) By optimizing its debt-to-equity mix and improving its creditworthiness

(C) By solely relying on equity financing regardless of cost implications

(D) By increasing dividend payouts to eliminate the need for borrowing

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