Intermediate Finance Practice Exam
1. Which of the following represents the primary goal of financial management?
A. Maximizing current market share
B. Minimizing operational costs
C. Maximizing shareholder wealth
D. Ensuring high employee satisfaction
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2. A bond with a face value of $1,000 has a coupon rate of 6% and pays interest semiannually. What is the annual interest payment?
A. $30
B. $60
C. $90
D. $120
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3. Which of the following is the best definition of the cost of capital?
A. The interest rate on corporate bonds
B. The return required by investors for providing funds
C. The total cost of production in a business
D. The expense incurred in launching a new project
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4. If a firm increases its debt-to-equity ratio, what is likely to happen to its financial leverage?
A. Financial leverage decreases
B. Financial leverage remains unchanged
C. Financial leverage increases
D. Financial leverage is eliminated
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5. The primary function of a financial intermediary is to:
A. Eliminate investment risks
B. Provide direct investment options to investors
C. Facilitate the flow of funds between savers and borrowers
D. Regulate financial markets
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6. Which of the following is a disadvantage of issuing equity rather than debt?
A. Reduced control by existing owners
B. Increased financial risk
C. Higher fixed interest payments
D. Limited tax benefits
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7. A project has a required return of 12%. Its cash flows are $5,000 in year 1, $5,000 in year 2, and $5,000 in year 3. The initial cost is $12,000. What is the net present value (NPV)?
A. $1,202.76
B. $2,303.22
C. $3,400.11
D. $4,000.45
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8. The weighted average cost of capital (WACC) is best described as:
A. The average interest rate on all loans of the company
B. The average rate of return required by all stakeholders
C. The minimum return a company must earn on its investments
D. The interest rate charged by creditors
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9. Which of the following is not a component of the Capital Asset Pricing Model (CAPM)?
A. Risk-free rate
B. Market risk premium
C. Beta
D. Weighted average cost of capital
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10. A firm’s dividend payout ratio is 40%. If its net income is $1,000,000, how much is paid out as dividends?
A. $200,000
B. $300,000
C. $400,000
D. $600,000
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11. What is the primary purpose of financial forecasting?
A. To calculate net present value
B. To prepare for future financial needs
C. To determine current market share
D. To maximize dividend payments
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12. Which of the following investment appraisal methods ignores the time value of money?
A. Payback period
B. Net present value
C. Internal rate of return
D. Profitability index
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13. What does a beta coefficient of 1.2 imply?
A. The asset is less risky than the market
B. The asset moves 20% more than the market
C. The asset moves 20% less than the market
D. The asset is unrelated to market movements
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14. Which of the following statements is true about preferred stock?
A. Preferred stockholders always have voting rights
B. Dividends on preferred stock are tax-deductible for the firm
C. Preferred stock dividends are usually fixed
D. Preferred stockholders are paid after common stockholders
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15. A company has an EBIT of $100,000 and a tax rate of 30%. If it pays $10,000 in interest, what is its net income?
A. $63,000
B. $70,000
C. $80,000
D. $90,000
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16. What happens to the price of a bond if interest rates rise?
A. It increases
B. It decreases
C. It remains the same
D. It doubles
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17. The main purpose of diversification in a portfolio is to:
A. Increase returns
B. Eliminate market risk
C. Reduce unsystematic risk
D. Guarantee profits
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18. Which of the following is true about a perpetuity?
A. It has a finite number of payments
B. Its present value is equal to the annual cash flow divided by the discount rate
C. Its future value can be calculated at any point
D. It has increasing payments over time
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19. What is the internal rate of return (IRR)?
A. The return required by creditors
B. The discount rate that sets NPV to zero
C. The average annual return of a project
D. The maximum return a project can generate
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20. If the correlation coefficient between two stocks is -1, it means:
A. They are perfectly positively correlated
B. They are perfectly negatively correlated
C. They have no correlation
D. They have high systematic risk
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21. Which of the following best describes agency costs?
A. Costs incurred in marketing new products
B. Costs associated with conflicts between management and shareholders
C. Costs of raising external capital
D. Costs of production inefficiencies
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22. The cash conversion cycle is:
A. The time it takes to pay suppliers
B. The time required to convert inventory into sales and collect cash
C. The time it takes to process customer payments
D. The time it takes to complete the production process
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23. A callable bond allows:
A. The investor to call the issuer for additional payments
B. The issuer to repay the bond before maturity
C. The investor to extend the bond’s maturity
D. The bond to pay higher coupons if called
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24. If a firm has a higher current ratio, it indicates:
A. Better long-term solvency
B. Better short-term liquidity
C. Poor profitability
D. Higher financial leverage
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25. A zero-coupon bond:
A. Pays no interest over its life
B. Pays periodic interest but no principal
C. Trades at a premium to face value
D. Pays its full face value at maturity
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26. What does the price-to-earnings (P/E) ratio measure?
A. The return on investment for equity holders
B. The relationship between a stock’s price and its earnings
C. The rate at which dividends grow
D. The ratio of retained earnings to dividends
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27. A firm’s operating leverage is primarily influenced by:
A. Its cost structure
B. Its debt-equity ratio
C. Its dividend payout policy
D. Its tax rate
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28. A firm pays $1.50 as its annual dividend and the stock sells for $25. What is the dividend yield?
A. 5%
B. 6%
C. 7%
D. 8%
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29. Which type of risk cannot be eliminated by diversification?
A. Systematic risk
B. Unsystematic risk
C. Business risk
D. Operational risk
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30. Which of the following is an example of a primary market transaction?
A. Buying shares on the stock exchange
B. Purchasing government bonds from a brokerage
C. An IPO of a new company
D. Selling previously issued corporate bonds
31. What is the primary purpose of a stock split?
A. To increase the company’s net income
B. To reduce the number of outstanding shares
C. To make shares more affordable to investors
D. To increase the dividend per share
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32. Which of the following is a disadvantage of debt financing?
A. Dilution of ownership
B. Obligation to make fixed payments
C. Higher tax liability
D. Reduced leverage
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33. A project has a profitability index (PI) of 1.2. What does this indicate?
A. The project should be rejected
B. The project has a negative NPV
C. The project creates value for the firm
D. The project has an internal rate of return (IRR) below the required return
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34. What does a higher standard deviation of an investment’s returns indicate?
A. Lower risk
B. Higher risk
C. Consistent returns
D. Better performance
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35. The Modigliani and Miller (M&M) Proposition I (without taxes) states that:
A. The value of a firm is dependent on its capital structure
B. The value of a firm is independent of its capital structure
C. Equity financing is always cheaper than debt financing
D. Dividend policy affects firm valuation
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36. What is the purpose of a sinking fund in bonds?
A. To reduce the bondholder’s risk
B. To increase the bond’s interest rate
C. To finance new projects for the company
D. To ensure early repayment of bonds
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37. If a firm issues new shares to raise equity, this is an example of:
A. Debt financing
B. Primary market activity
C. Secondary market activity
D. Dividend reinvestment
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38. A firm’s capital structure is composed of:
A. Current liabilities and short-term loans
B. Long-term debt and equity
C. Total assets and retained earnings
D. Cash reserves and fixed assets
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39. What is the relationship between interest rates and bond prices?
A. Direct relationship
B. Inverse relationship
C. No relationship
D. Always constant
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40. If the payback period of a project is longer than its expected useful life, the project:
A. Has a positive NPV
B. Should be accepted
C. Should be rejected
D. Has a profitability index greater than 1
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41. The difference between a stock’s market price and its intrinsic value is known as:
A. Market premium
B. Market discount
C. Mispricing
D. Arbitrage
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42. A firm’s liquidity is best measured by which of the following ratios?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Inventory turnover
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43. If the required rate of return increases, the value of a stock paying constant dividends will:
A. Increase
B. Decrease
C. Remain unchanged
D. Double
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44. What type of risk is reduced when a portfolio is diversified?
A. Systematic risk
B. Market risk
C. Unsystematic risk
D. Interest rate risk
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45. A firm’s degree of operating leverage (DOL) is primarily determined by:
A. The proportion of fixed costs in its cost structure
B. The amount of debt in its capital structure
C. The level of dividends it pays
D. The firm’s tax rate
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46. If a firm increases its dividend payout ratio, what will likely happen to its retention ratio?
A. It will increase
B. It will decrease
C. It will remain constant
D. It will become zero
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47. Which of the following is the best description of a futures contract?
A. A contract to buy or sell an asset at a specified price today
B. A contract to buy or sell an asset at a specified price on a future date
C. A contract to exchange one currency for another
D. A contract that pays dividends over time
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48. In the context of time value of money, what is compounding?
A. Adding a fixed value to the principal every year
B. Calculating the future value of a sum invested today
C. Subtracting interest payments from the principal
D. Dividing the future value by the present value
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49. A firm’s financial leverage is measured by:
A. The ratio of debt to equity
B. The ratio of assets to liabilities
C. The ratio of retained earnings to net income
D. The ratio of sales to total assets
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50. Which of the following is an example of systematic risk?
A. A company’s CEO resigning unexpectedly
B. A sudden spike in oil prices affecting all industries
C. A company losing a major lawsuit
D. A product recall for a specific brand
51. Which of the following is a characteristic of preferred stock?
A. Voting rights
B. Fixed dividends
C. Maturity date
D. Tax-deductible dividends
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52. When calculating a project’s net present value (NPV), which of the following cash flows is excluded?
A. Initial investment
B. Operating cash inflows
C. Sunk costs
D. Terminal cash inflows
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53. If the internal rate of return (IRR) of a project is less than the required rate of return, the project should:
A. Be accepted
B. Be rejected
C. Be reevaluated
D. Be compared to the profitability index
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54. The cost of retained earnings is equal to:
A. The risk-free rate
B. The return required by equity investors
C. The firm’s average cost of capital
D. The dividend payout ratio
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55. A bond selling at a price higher than its face value is called a:
A. Discount bond
B. Par bond
C. Premium bond
D. Convertible bond
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56. A portfolio with the minimum level of risk for a given level of return is known as the:
A. Efficient portfolio
B. Capital market line
C. Optimal portfolio
D. Risk-free portfolio
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57. Which of the following is true about the weighted average cost of capital (WACC)?
A. It decreases as more equity is added
B. It reflects the firm’s minimum required return
C. It is the same for all firms
D. It is not affected by changes in capital structure
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58. A firm’s beta measures:
A. Its total risk
B. Its systematic risk
C. Its unsystematic risk
D. Its liquidity risk
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59. Which method is best for evaluating mutually exclusive projects?
A. Payback period
B. Net present value (NPV)
C. Profitability index
D. Internal rate of return (IRR)
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60. What happens to the value of a firm when the cost of equity increases?
A. The value increases
B. The value decreases
C. The value remains unchanged
D. It depends on the debt-to-equity ratio
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61. A company with a high price-to-earnings (P/E) ratio is likely to:
A. Be undervalued
B. Be overvalued
C. Have high growth expectations
D. Have low dividend payout
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62. The goal of corporate financial management is to:
A. Maximize the company’s revenue
B. Maximize shareholder wealth
C. Minimize operating costs
D. Maximize employee satisfaction
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63. What is the effect of financial leverage on a firm’s earnings per share (EPS)?
A. Increases EPS in both good and bad times
B. Reduces EPS in good times but increases in bad times
C. Amplifies both gains and losses
D. Has no impact on EPS
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64. What is the primary purpose of a call provision in bonds?
A. To allow bondholders to sell back bonds early
B. To allow issuers to repay bonds before maturity
C. To increase the interest rate on bonds
D. To reduce bond prices in the market
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65. Which of the following is a limitation of the payback period method?
A. It does not account for project risk
B. It ignores cash flows after the payback period
C. It is difficult to calculate
D. It always gives a negative NPV
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66. The equity multiplier is calculated as:
A. Total assets divided by total equity
B. Total debt divided by total equity
C. Total liabilities divided by total assets
D. Total equity divided by total assets
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67. A firm’s current ratio is 2.5. If the firm pays off some of its current liabilities with cash, what will happen to the current ratio?
A. Increase
B. Decrease
C. Stay the same
D. Cannot be determined
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68. The difference between a bond’s yield to maturity (YTM) and its coupon rate occurs when:
A. The bond sells at par
B. The bond sells at a premium or discount
C. The bond is risk-free
D. The bond is callable
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69. A firm that increases its debt ratio will most likely:
A. Lower its financial risk
B. Increase its return on equity (ROE)
C. Decrease its tax shield
D. Reduce its operating income
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70. Which financial statement shows how a firm’s operations have affected its cash position over a specific period?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of retained earnings
71. Which of the following will decrease the value of a call option?
A. An increase in the underlying asset’s volatility
B. A decrease in the underlying asset’s price
C. An increase in the time to expiration
D. An increase in the risk-free rate
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72. The primary reason for a firm to engage in hedging is to:
A. Maximize profits
B. Reduce financial risk
C. Increase leverage
D. Eliminate all risks
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73. What does the quick ratio measure?
A. A firm’s ability to cover short-term liabilities using liquid assets
B. A firm’s profitability
C. The efficiency of a firm’s inventory management
D. The debt burden of a firm
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74. Which of the following capital budgeting methods considers the time value of money?
A. Payback period
B. Net present value (NPV)
C. Accounting rate of return
D. Profit margin
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75. In the Modigliani-Miller theorem (without taxes), capital structure is:
A. Irrelevant to firm value
B. Crucial for increasing firm value
C. Only relevant in the presence of bankruptcy costs
D. Determined solely by the cost of debt
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76. The risk-free rate in the Capital Asset Pricing Model (CAPM) represents:
A. The average return of the market
B. The return on a riskless asset
C. The return on government bonds only
D. The market premium
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77. The dividend discount model (DDM) assumes:
A. Stock price is based only on historical dividends
B. Dividends grow at a constant rate forever
C. Dividends are irrelevant to stock valuation
D. Dividends decrease over time
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78. A high degree of operating leverage indicates that a firm:
A. Has high fixed costs relative to variable costs
B. Has low fixed costs relative to variable costs
C. Is highly diversified
D. Has minimal risk exposure
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79. Which of the following is the best measure of a stock’s total risk?
A. Beta
B. Standard deviation of returns
C. Correlation with the market
D. Expected return
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80. A firm’s cash conversion cycle is the:
A. Average time it takes to convert net income into cash
B. Total time required to produce and sell a product
C. Time between payment to suppliers and collection from customers
D. Time required to repay short-term debt
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81. If a company issues bonds at a discount, the market interest rate is:
A. Equal to the bond’s coupon rate
B. Lower than the bond’s coupon rate
C. Higher than the bond’s coupon rate
D. Not related to the bond’s coupon rate
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82. What is the primary purpose of financial ratios?
A. To predict future stock prices
B. To compare a firm’s performance to industry standards
C. To determine the intrinsic value of a firm’s assets
D. To calculate the firm’s taxes
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83. Which of the following represents unsystematic risk?
A. Changes in inflation
B. Recession in the economy
C. Poor management decisions within a company
D. Changes in interest rates
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84. What is the primary advantage of issuing equity instead of debt?
A. It avoids dividend payments
B. It does not dilute ownership
C. It reduces financial risk
D. It increases financial leverage
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85. A zero-coupon bond does not pay periodic interest. The bondholder earns a return by:
A. Receiving periodic dividends
B. Buying the bond at a discount and receiving face value at maturity
C. Investing in risk-free securities
D. Selling the bond in the secondary market
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86. Which of the following is not a determinant of a stock’s price?
A. The firm’s earnings
B. The firm’s dividend policy
C. The required rate of return
D. The market value of the firm’s liabilities
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87. If a firm’s actual growth rate exceeds its sustainable growth rate, the firm will need to:
A. Decrease its debt
B. Increase its dividend payout ratio
C. Increase external financing
D. Reduce its sales growth
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88. The profitability index (PI) is calculated as:
A. Total revenues divided by total costs
B. Net present value (NPV) divided by initial investment
C. Present value of future cash inflows divided by initial investment
D. Total assets divided by total liabilities
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89. Which of the following is most likely to decrease a firm’s weighted average cost of capital (WACC)?
A. Decreasing the firm’s debt-to-equity ratio
B. Increasing the firm’s proportion of equity financing
C. Lowering the cost of debt through lower interest rates
D. Increasing the firm’s beta
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90. The effective annual rate (EAR) is always greater than or equal to the nominal rate when:
A. Interest is compounded annually
B. Interest is compounded more than once a year
C. The nominal rate is high
D. The investment period is short
91. Which of the following will increase the net present value (NPV) of a project?
A. A decrease in the discount rate
B. An increase in the initial investment
C. A delay in cash inflows
D. A reduction in future cash inflows
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92. The internal rate of return (IRR) is best described as the discount rate that:
A. Maximizes the profitability of the project
B. Makes the net present value (NPV) of a project equal to zero
C. Minimizes the payback period
D. Equals the weighted average cost of capital (WACC)
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93. Which of the following is an advantage of using debt financing?
A. Reduced financial leverage
B. Tax-deductible interest payments
C. Increased equity dilution
D. Reduced financial risk
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94. A firm’s weighted average cost of capital (WACC) is primarily affected by:
A. The firm’s operating cash flows
B. The proportion of debt and equity in its capital structure
C. The size of the firm’s dividends
D. The variability of the firm’s stock price
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95. What happens to the price of a bond when market interest rates increase?
A. The bond price increases
B. The bond price decreases
C. The bond price remains unchanged
D. The bond price is unaffected if it’s a zero-coupon bond
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96. Which of the following statements about preferred stock is correct?
A. Preferred stockholders have voting rights
B. Dividends on preferred stock are tax-deductible for the issuing firm
C. Preferred stock dividends are fixed and must be paid before common stock dividends
D. Preferred stock has a maturity date like bonds
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97. A portfolio’s beta measures:
A. The total risk of the portfolio
B. The portfolio’s unsystematic risk
C. The portfolio’s systematic risk relative to the market
D. The correlation between the portfolio and risk-free assets
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98. What is the impact of financial leverage on a firm’s return on equity (ROE)?
A. It increases ROE when the firm’s return on assets (ROA) is greater than the cost of debt
B. It decreases ROE regardless of the firm’s ROA
C. It has no effect on ROE
D. It reduces ROE when the firm’s ROA is greater than the cost of equity
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99. Which of the following is a characteristic of callable bonds?
A. Bondholders can convert them into equity
B. Issuers can redeem them before maturity
C. They pay no periodic interest
D. They are risk-free investments
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100. A firm with a high current ratio but a low quick ratio likely has:
A. High levels of accounts receivable
B. High levels of inventory
C. Low levels of accounts payable
D. High levels of cash
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101. The purpose of a sinking fund provision is to:
A. Protect bondholders against interest rate fluctuations
B. Ensure the repayment of bond principal over time
C. Minimize dividend payments
D. Increase a company’s leverage
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102. In capital budgeting, which cost is considered irrelevant?
A. Sunk costs
B. Opportunity costs
C. Incremental costs
D. Depreciation
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103. Which of the following methods of project evaluation is most likely to ignore the time value of money?
A. Internal rate of return (IRR)
B. Net present value (NPV)
C. Payback period
D. Profitability index (PI)
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104. A firm decides to issue equity instead of debt. This decision will:
A. Decrease the firm’s leverage
B. Increase the firm’s interest expense
C. Increase the risk of financial distress
D. Decrease the firm’s liquidity
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105. If the correlation between two assets is -1, then:
A. The assets are uncorrelated
B. The assets move in opposite directions perfectly
C. The assets have no systematic risk
D. The assets have the same returns
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106. The break-even point for a firm is achieved when:
A. Fixed costs are minimized
B. Total revenues equal total costs
C. Variable costs exceed total revenues
D. Total revenues exceed total costs
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107. Which of the following is a disadvantage of using the payback period for project evaluation?
A. It ignores cash flows beyond the payback period
B. It considers the time value of money
C. It is difficult to calculate
D. It overemphasizes long-term profitability
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108. In the context of financial derivatives, a forward contract is:
A. Traded on an exchange
B. A customized agreement between two parties
C. Settled daily to reflect changes in market prices
D. An option to buy or sell an asset
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109. A high inventory turnover ratio indicates:
A. Poor inventory management
B. Efficient inventory utilization
C. High levels of obsolete inventory
D. Increased production costs
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110. What is the primary role of the capital market?
A. To facilitate the trading of commodities
B. To provide short-term financing
C. To allocate long-term funds between savers and borrowers
D. To manage a company’s working capital
111. The cost of equity can be estimated using:
A. The capital asset pricing model (CAPM)
B. The weighted average cost of capital (WACC)
C. The net present value (NPV) method
D. The internal rate of return (IRR)
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112. Which of the following factors directly affects a company’s beta?
A. The firm’s dividend payout ratio
B. The firm’s industry and operating leverage
C. The firm’s interest expense
D. The firm’s total assets
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113. Which type of risk is eliminated through diversification?
A. Systematic risk
B. Unsystematic risk
C. Market risk
D. Interest rate risk
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114. A bond with a face value of $1,000 and a coupon rate of 5% pays:
A. $50 annually until maturity
B. $500 annually until maturity
C. $5 annually until maturity
D. $1,050 annually until maturity
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115. When a firm repurchases its own shares, the effect on earnings per share (EPS) is typically:
A. A decrease in EPS
B. An increase in EPS
C. No change in EPS
D. A reduction in total earnings
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116. Which of the following measures the sensitivity of a bond’s price to changes in interest rates?
A. Duration
B. Yield to maturity (YTM)
C. Coupon rate
D. Face value
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117. In the dividend discount model (DDM), the value of a stock is calculated as:
A. The present value of all expected future dividends
B. The future value of all expected future dividends
C. The present value of the firm’s free cash flows
D. The book value of the company’s equity
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118. A project with a profitability index (PI) greater than 1:
A. Has a negative net present value (NPV)
B. Should be rejected
C. Is expected to create value for the firm
D. Indicates the project’s internal rate of return (IRR) is less than the cost of capital
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119. When a company uses too much debt, it risks:
A. Lower tax savings
B. Financial distress
C. Increased equity dilution
D. Lower operating leverage
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120. The primary purpose of capital budgeting is to:
A. Evaluate short-term financing options
B. Estimate the firm’s working capital requirements
C. Make long-term investment decisions
D. Determine the cost of capital
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121. A callable bond:
A. Can be converted into equity at the option of the bondholder
B. Allows the issuer to repay the bond before maturity
C. Pays no interest until maturity
D. Is traded at a premium by default
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122. The degree of operating leverage (DOL) measures:
A. The sensitivity of net income to changes in sales
B. The proportion of debt in a firm’s capital structure
C. The firm’s ability to cover its fixed costs
D. The sensitivity of operating income to changes in sales
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123. A zero-coupon bond:
A. Pays periodic interest payments
B. Trades at a premium to face value
C. Pays no interest until maturity
D. Is risk-free
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124. Which of the following is a limitation of the CAPM?
A. It cannot be applied to stocks
B. It ignores risk-free rates
C. It assumes a perfect market with no transaction costs
D. It overestimates the market risk premium
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125. A stock with a beta of 1.5 is:
A. Less volatile than the market
B. As volatile as the market
C. More volatile than the market
D. Unaffected by market fluctuations
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126. Which of the following is NOT a component of the WACC formula?
A. Cost of debt
B. Market risk premium
C. Cost of equity
D. Target capital structure weights
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127. A firm’s current ratio is calculated as:
A. Current assets divided by current liabilities
B. Total assets divided by current liabilities
C. Current liabilities divided by current assets
D. Total liabilities divided by current assets
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128. Which of the following is true about preferred stock?
A. It has a maturity date
B. Dividends are tax-deductible for the issuing firm
C. Dividends are fixed and must be paid before common stock dividends
D. It represents debt on the balance sheet
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129. Which of the following is a measure of liquidity?
A. Price-to-earnings (P/E) ratio
B. Debt-to-equity ratio
C. Quick ratio
D. Beta
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130. What is the primary goal of financial management?
A. Maximizing net income
B. Minimizing risk
C. Maximizing shareholder wealth
D. Increasing market share
131. The primary purpose of diversification in an investment portfolio is to:
A. Increase the return of the portfolio
B. Reduce the risk of the portfolio
C. Achieve a higher beta
D. Maximize the portfolio’s liquidity
________________________________________
132. A firm with a high debt-to-equity ratio is considered:
A. Low-risk
B. High-risk
C. Balanced-risk
D. Risk-free
________________________________________
133. The price of a bond is inversely related to:
A. The coupon rate
B. Market interest rates
C. The face value
D. The bond’s maturity date
________________________________________
134. A project has an NPV of zero. What does this imply about the project’s IRR?
A. The IRR is greater than the cost of capital
B. The IRR is equal to the cost of capital
C. The IRR is less than the cost of capital
D. The project is unprofitable
________________________________________
135. The trade-off theory of capital structure suggests that:
A. Firms should rely entirely on debt financing
B. Firms should balance the benefits of debt (tax shields) with the costs of debt (financial distress)
C. Firms should avoid debt financing altogether
D. Equity financing is always cheaper than debt financing
________________________________________
136. The dividend discount model (DDM) is most applicable to:
A. Growth stocks
B. Non-dividend-paying stocks
C. Companies with stable dividend payments
D. Companies in emerging markets
________________________________________
137. Which of the following is a potential consequence of issuing too much debt?
A. Lower interest expenses
B. Increased risk of bankruptcy
C. Increased flexibility in financial decisions
D. Decreased cost of capital
________________________________________
138. The market risk premium is defined as:
A. The difference between the return on the market and the risk-free rate
B. The return on the market
C. The return on a risk-free asset
D. The difference between the return on a risk-free asset and the market
________________________________________
139. A company’s beta measures:
A. The overall risk of the company
B. The company’s financial risk
C. The sensitivity of the company’s stock price to market movements
D. The risk-free rate associated with the company’s stock
________________________________________
140. The weighted average cost of capital (WACC) represents:
A. The return required by investors for the firm’s total capital
B. The cost of issuing new equity
C. The cost of debt financing
D. The cost of equity financing only
________________________________________
141. The payback period of a project is the time it takes for:
A. The project to break even
B. The project’s initial investment to be recovered from its cash inflows
C. The project to generate positive net present value (NPV)
D. The project to generate sufficient earnings
________________________________________
142. In the context of bonds, the term “yield to maturity” (YTM) refers to:
A. The coupon rate of the bond
B. The expected return if the bond is held to maturity
C. The price at which the bond is trading
D. The bond’s annual interest payment
________________________________________
143. Which of the following is a characteristic of common stock?
A. It has a fixed dividend
B. It represents a company’s debt
C. It carries voting rights
D. It has priority over preferred stock in case of liquidation
________________________________________
144. The time value of money concept suggests that:
A. A dollar today is worth more than a dollar in the future due to the opportunity to earn interest
B. A dollar today is worth less than a dollar in the future due to inflation
C. The value of money remains constant over time
D. The future value of money is unaffected by interest rates
________________________________________
145. Which of the following statements about the capital asset pricing model (CAPM) is correct?
A. It assumes that all investors have different expectations of future returns
B. It assumes that markets are inefficient
C. It calculates the required return based on the risk-free rate, beta, and market risk premium
D. It is used primarily to calculate a company’s intrinsic value
________________________________________
146. The economic value added (EVA) metric is used to measure:
A. The firm’s total assets
B. The firm’s profitability after accounting for the cost of capital
C. The firm’s market value
D. The total equity capital of the firm
________________________________________
147. A firm with a high quick ratio and a low current ratio is likely to have:
A. High levels of accounts receivable
B. High levels of inventory
C. A large amount of cash and near-cash assets
D. A high degree of financial leverage
________________________________________
148. Which of the following is the most likely result of using financial leverage?
A. Increased return on equity (ROE) when the firm’s return on assets (ROA) exceeds the cost of debt
B. Decreased risk to shareholders
C. Lower interest expenses on debt
D. Reduced volatility in the firm’s earnings
________________________________________
149. Which of the following is NOT considered when calculating a company’s cost of equity?
A. The risk-free rate
B. The company’s debt-to-equity ratio
C. The market risk premium
D. The company’s beta
________________________________________
150. In the context of financial statement analysis, the acid-test ratio is a more stringent measure of liquidity than the current ratio because it:
A. Excludes short-term debt
B. Excludes inventory from current assets
C. Excludes fixed assets
D. Includes cash equivalents in current assets
151. The Modigliani-Miller proposition suggests that in a world with no taxes and perfect capital markets:
A. A firm’s value is affected by its capital structure
B. The optimal capital structure maximizes the firm’s value
C. A firm’s value is independent of its capital structure
D. The cost of equity is constant regardless of leverage
________________________________________
152. Which of the following would lead to an increase in the cost of debt?
A. An increase in the firm’s credit rating
B. A decrease in the risk-free rate
C. An increase in the firm’s perceived risk of default
D. A decrease in inflation expectations
________________________________________
153. The efficient frontier in portfolio theory represents:
A. The maximum return for a given level of risk
B. The optimal capital structure of a firm
C. The relationship between interest rates and stock prices
D. The expected return of a portfolio with no risk
________________________________________
154. A callable bond is advantageous to the issuer because it:
A. Pays a higher coupon rate
B. Allows the issuer to repay the bond early if interest rates decline
C. Increases the bond’s price in the market
D. Cannot be repaid before maturity
________________________________________
155. The price of a bond will increase when:
A. Market interest rates increase
B. The bond’s credit rating is downgraded
C. The bond’s coupon rate is higher than the market rate
D. The bond’s maturity is shortened
________________________________________
156. In the dividend discount model (DDM), the intrinsic value of a stock is calculated by:
A. Dividing the expected dividend by the required rate of return
B. Discounting all future dividends at the required rate of return
C. Adding the expected dividends to the stock’s current price
D. Calculating the book value of the stock
________________________________________
157. The price-to-earnings (P/E) ratio is commonly used to:
A. Assess a company’s profitability relative to its market value
B. Evaluate a company’s creditworthiness
C. Measure the firm’s operational efficiency
D. Determine the firm’s liquidity
________________________________________
158. Which of the following is true about the net present value (NPV) rule?
A. If the NPV is positive, the project should be rejected
B. If the NPV is zero, the project is considered risk-free
C. If the NPV is negative, the project should be accepted
D. If the NPV is positive, the project should be accepted
________________________________________
159. Which of the following is an example of systematic risk?
A. A company’s product recall
B. Changes in interest rates
C. A management change at a firm
D. A labor strike at a company
________________________________________
160. The risk-free rate is typically represented by:
A. The yield on corporate bonds
B. The yield on government treasury securities
C. The yield on stocks
D. The yield on municipal bonds
________________________________________
161. The key assumption of the capital asset pricing model (CAPM) is that:
A. Investors can only hold risk-free assets
B. Markets are inefficient
C. Investors are rational and risk-averse
D. There is no risk in the market
________________________________________
162. Which of the following would decrease a firm’s weighted average cost of capital (WACC)?
A. An increase in the cost of debt
B. A reduction in the firm’s equity risk premium
C. A reduction in the debt-to-equity ratio
D. A decrease in the tax rate
________________________________________
163. The Gordon growth model assumes that dividends:
A. Grow at a constant rate indefinitely
B. Are paid in perpetuity
C. Increase exponentially each year
D. Are non-existent
________________________________________
164. Which of the following is NOT a factor that determines the cost of equity?
A. The risk-free rate
B. The company’s beta
C. The market risk premium
D. The firm’s dividend payout ratio
________________________________________
165. A project with an internal rate of return (IRR) that exceeds the firm’s cost of capital will:
A. Decrease the firm’s value
B. Have a positive net present value (NPV)
C. Increase the firm’s cost of capital
D. Be rejected
________________________________________
166. Which of the following is a limitation of the payback period method?
A. It ignores the time value of money
B. It provides a measure of profitability
C. It considers all cash inflows
D. It assumes cash flows are uniform
________________________________________
167. The price of a stock is determined by:
A. The supply and demand for the stock in the market
B. The company’s earnings before interest and taxes (EBIT)
C. The firm’s total assets
D. The interest rate on the firm’s bonds
________________________________________
168. Which of the following statements is true about the risk-return trade-off?
A. Higher-risk investments always provide higher returns
B. Lower-risk investments provide higher returns with no additional risk
C. Higher-risk investments provide higher expected returns to compensate for the additional risk
D. There is no relationship between risk and return
________________________________________
169. The price of a bond with a coupon rate greater than the current market interest rate will trade at:
A. A premium
B. A discount
C. Par value
D. At the market interest rate
________________________________________
170. The weighted average cost of capital (WACC) is used to:
A. Determine the company’s cost of equity
B. Set the company’s dividend policy
C. Discount the company’s future cash flows in valuation models
D. Set the company’s capital structure
171. The primary goal of financial management is to:
A. Maximize profits
B. Maximize shareholder wealth
C. Minimize debt
D. Maximize sales
________________________________________
172. A firm with a high degree of operating leverage:
A. Has a low proportion of fixed costs
B. Has a low degree of financial risk
C. Is more sensitive to changes in sales
D. Has a high level of variable costs
________________________________________
173. If a firm’s dividend payout ratio increases, what is the likely impact on the firm’s retention ratio?
A. It increases
B. It decreases
C. It remains the same
D. It becomes negative
________________________________________
174. The optimal capital structure of a firm is the one that:
A. Minimizes the cost of debt
B. Maximizes the firm’s value
C. Maximizes the firm’s debt-equity ratio
D. Minimizes the risk of bankruptcy
________________________________________
175. The dividend discount model (DDM) assumes that dividends grow at:
A. A constant rate indefinitely
B. A rate equal to the inflation rate
C. A rate equal to the risk-free rate
D. A rate determined by the cost of debt
________________________________________
176. A bond’s coupon rate is:
A. The rate at which the bond’s price will increase
B. The interest rate that the bondholder will receive annually
C. The market interest rate for similar bonds
D. The yield that investors expect from the bond
________________________________________
177. A higher interest rate will:
A. Decrease the present value of future cash flows
B. Increase the present value of future cash flows
C. Have no effect on the present value of future cash flows
D. Increase the future value of an investment
________________________________________
178. In the context of the capital asset pricing model (CAPM), the risk premium is:
A. The difference between the risk-free rate and the market rate
B. The difference between the expected return and the risk-free rate
C. The return expected from the market portfolio
D. The difference between the expected return and the bond yield
________________________________________
179. Which of the following best describes the relationship between risk and return in modern portfolio theory?
A. Higher risk results in lower returns
B. Risk and return are unrelated
C. Higher risk results in higher potential returns
D. Lower risk results in higher returns
________________________________________
180. A company with a beta of 1.5 is expected to:
A. Be less volatile than the overall market
B. Have the same volatility as the overall market
C. Be more volatile than the overall market
D. Have no risk at all
________________________________________
181. The concept of financial leverage refers to:
A. Using borrowed funds to increase the potential return on investment
B. Increasing the amount of equity financing used by the firm
C. Decreasing the amount of debt in the capital structure
D. The firm’s use of stock options as compensation
________________________________________
182. The risk associated with changes in interest rates affecting the value of a bond is known as:
A. Liquidity risk
B. Credit risk
C. Interest rate risk
D. Default risk
________________________________________
183. A firm is considering two mutually exclusive projects. If the NPV of Project A is $500,000 and the NPV of Project B is $400,000, which project should the firm select?
A. Project A, because it has a higher NPV
B. Project B, because it has a higher NPV
C. Both projects, because they have positive NPVs
D. Neither project, because the NPVs are negative
________________________________________
184. A firm’s debt ratio is defined as:
A. Total liabilities divided by total assets
B. Total assets divided by total liabilities
C. Total equity divided by total assets
D. Total liabilities divided by total equity
________________________________________
185. If a company’s cost of equity is 12%, its cost of debt is 6%, and the tax rate is 30%, what is the weighted average cost of capital (WACC) if the company’s capital structure consists of 60% equity and 40% debt?
A. 9.6%
B. 10.2%
C. 8.4%
D. 11.2%
________________________________________
186. Which of the following is NOT a feature of preferred stock?
A. Fixed dividend payments
B. Priority over common stock in dividends and liquidation
C. Voting rights in the company
D. Callable by the issuer
________________________________________
187. A firm is considering a project with an initial investment of $500,000 and expected cash inflows of $100,000 per year for 7 years. If the required rate of return is 8%, what is the NPV of the project?
A. $46,000
B. $79,000
C. $34,000
D. $59,000
________________________________________
188. The capital market line (CML) represents:
A. The relationship between risk and return for a portfolio of risky assets
B. The relationship between risk and return for a single risky asset
C. The risk-free rate
D. The relationship between the risk-free asset and a portfolio of risky assets
________________________________________
189. The basic purpose of financial leverage is to:
A. Decrease the cost of equity
B. Increase the potential return to equity holders
C. Decrease the risk to equity holders
D. Increase the liquidity of the company’s assets
________________________________________
190. In an efficient market, the price of a security will:
A. Always reflect its intrinsic value
B. Always reflect the market’s risk tolerance
C. Adjust immediately to new information
D. Remain unchanged unless a major event occurs
191. The risk associated with the overall market that cannot be eliminated through diversification is called:
A. Unsystematic risk
B. Systematic risk
C. Credit risk
D. Liquidity risk
________________________________________
192. A firm has a current ratio of 2.0. This means that:
A. The firm has twice as many liabilities as assets
B. The firm has enough current assets to cover its current liabilities twice
C. The firm’s current liabilities exceed its current assets
D. The firm has a current ratio of 2 to 1
________________________________________
193. The Modigliani-Miller proposition suggests that in an efficient market, the value of a firm is:
A. Dependent on its capital structure
B. Independent of its capital structure
C. Maximized by using 100% debt
D. Maximized by using 100% equity
________________________________________
194. The optimal capital structure is achieved when the:
A. Weighted average cost of capital (WACC) is maximized
B. Weighted average cost of capital (WACC) is minimized
C. Firm’s equity is equal to its debt
D. Firm’s debt is higher than its equity
________________________________________
195. The price of a bond is determined by:
A. The expected interest rate and the bond’s credit rating
B. The future cash flows and the required rate of return
C. The coupon payments only
D. The bond’s maturity date
________________________________________
196. If a company increases its dividend payout ratio, it will:
A. Increase its retention ratio
B. Decrease its retention ratio
C. Increase its internal growth rate
D. Decrease its external financing needs
________________________________________
197. A company is planning to issue bonds. The coupon rate is set higher than the market rate. This bond will:
A. Sell at a discount
B. Sell at face value
C. Sell at a premium
D. Not be issued
________________________________________
198. A company with a high price-to-earnings (P/E) ratio is typically viewed as:
A. Having lower risk
B. Undervalued by the market
C. A growth stock with high expected future earnings
D. A stable, mature company with slow growth
________________________________________
199. In the context of capital budgeting, the internal rate of return (IRR) is:
A. The discount rate that makes the NPV of a project equal to zero
B. The rate at which a project’s costs are fully recovered
C. The required rate of return for an investor
D. The discount rate that maximizes the project’s NPV
________________________________________
200. A firm’s capital budgeting decisions are primarily concerned with:
A. Allocating resources to projects that will maximize the firm’s value
B. Determining the optimal dividend payout ratio
C. Choosing between equity and debt financing
D. Managing the company’s working capital
________________________________________
201. The bond price and interest rates have an:
A. Inverse relationship
B. Direct relationship
C. No relationship
D. Dependent relationship
________________________________________
202. A firm with a higher beta coefficient will:
A. Have lower volatility compared to the market
B. Have higher volatility compared to the market
C. Have no relationship with the market
D. Be risk-free
________________________________________
203. In a perfectly competitive market, a firm’s stock price is determined by:
A. The supply and demand for the stock
B. The firm’s earnings
C. The firm’s debt-equity ratio
D. The firm’s market share
________________________________________
204. The pecking order theory suggests that firms prefer:
A. External financing over internal financing
B. Debt over equity when external financing is required
C. Equity over debt when external financing is required
D. To avoid any external financing
________________________________________
205. The price-earnings (P/E) ratio is calculated by:
A. Dividing the stock price by the earnings per share
B. Dividing the earnings per share by the stock price
C. Dividing the total earnings by the market capitalization
D. Dividing the total dividends by the stock price
________________________________________
206. A company that is highly leveraged is one that:
A. Has a large amount of equity relative to its assets
B. Has a large amount of debt relative to its equity
C. Has a large amount of cash flow relative to its expenses
D. Has a large amount of short-term liabilities
________________________________________
207. The profitability index (PI) is used to evaluate:
A. The expected return of a project relative to its costs
B. The internal rate of return for a project
C. The break-even point for a project
D. The financial stability of a project
________________________________________
208. A company with a low debt-to-equity ratio is considered:
A. To be highly leveraged
B. To be less risky in terms of financial stability
C. To have a high risk of bankruptcy
D. To be more profitable
________________________________________
209. The future value of an annuity due is calculated by:
A. Applying the formula for the future value of an ordinary annuity
B. Applying the formula for the future value of a lump sum
C. Multiplying the future value of an ordinary annuity by (1 + interest rate)
D. Subtracting the present value of the annuity from the future value
210. The weighted average cost of capital (WACC) is used to:
A. Determine the cost of equity capital
B. Measure the firm’s profitability
C. Evaluate the overall cost of financing for a firm
D. Calculate the value of a bond
________________________________________
211. The dividend discount model (DDM) is primarily used to:
A. Estimate the cost of debt
B. Estimate the market value of a firm
C. Estimate the intrinsic value of a stock
D. Calculate the return on equity
________________________________________
212. The dividend payout ratio is defined as:
A. Dividends divided by net income
B. Retained earnings divided by net income
C. Earnings before interest and taxes divided by net income
D. Dividends divided by equity
________________________________________
213. A firm’s cost of equity capital is determined by:
A. The weighted average cost of capital
B. The risk-free rate plus the market risk premium
C. The firm’s dividend payout ratio
D. The firm’s bond rating
________________________________________
214. A project’s net present value (NPV) is the difference between:
A. The initial investment and the future cash flows
B. The future cash inflows and the discount rate
C. The present value of cash inflows and the initial investment
D. The internal rate of return and the required rate of return
________________________________________
215. The price of a bond with a 6% coupon rate will increase if:
A. The market interest rate increases
B. The bond’s maturity is extended
C. The bond is downgraded by a rating agency
D. The market interest rate decreases
________________________________________
216. The capital structure of a firm refers to:
A. The mix of debt and equity used to finance its assets
B. The firm’s asset management strategy
C. The proportion of retained earnings to total assets
D. The proportion of current liabilities to current assets
________________________________________
217. In a perfect market, the capital asset pricing model (CAPM) assumes that:
A. Investors only care about risk and return
B. There are no taxes or transaction costs
C. There is a risk-free asset
D. All of the above
________________________________________
218. The beta coefficient of a stock measures its:
A. Volatility relative to the market
B. Intrinsic value
C. Dividend yield
D. Expected return
________________________________________
219. The duration of a bond measures:
A. The bond’s price sensitivity to interest rate changes
B. The bond’s yield to maturity
C. The total interest payments made over the life of the bond
D. The bond’s time to maturity
________________________________________
220. A firm’s debt-to-equity ratio is calculated by:
A. Dividing the firm’s total debt by its total equity
B. Dividing the firm’s total equity by its total assets
C. Dividing the firm’s total debt by its total assets
D. Dividing the firm’s equity by its debt obligations
________________________________________
221. Which of the following is an example of systematic risk?
A. A company’s new product fails
B. An increase in interest rates
C. A company’s management team makes poor decisions
D. A company is sued for a patent violation
________________________________________
222. A company’s price-to-earnings (P/E) ratio is used to evaluate:
A. The risk of investing in the company
B. The company’s dividend policy
C. The relative value of the company’s stock
D. The company’s total debt level
________________________________________
223. Which of the following actions would increase a firm’s financial leverage?
A. Issuing more equity
B. Paying off existing debt
C. Issuing more debt
D. Increasing dividend payouts
________________________________________
224. The internal rate of return (IRR) of a project is:
A. The rate at which the project’s net present value (NPV) is zero
B. The rate of return on the company’s total equity
C. The rate of return required to break even on a project
D. The rate that maximizes the project’s cash inflows
________________________________________
225. A firm is considering an investment project that costs $200,000 and is expected to generate cash flows of $50,000 per year for 5 years. If the required rate of return is 10%, what is the NPV of the project?
A. $41,049
B. $34,453
C. $22,000
D. $50,000
________________________________________
226. A company with a high debt-to-equity ratio is generally considered:
A. More financially stable
B. More risky in terms of financial solvency
C. Less likely to face bankruptcy
D. More profitable
________________________________________
227. A company’s capital expenditures are typically considered:
A. Short-term expenses
B. Long-term investments in physical assets
C. Dividend payments
D. Financing activities
________________________________________
228. The efficient frontier in portfolio theory represents:
A. The set of portfolios that offer the highest return for a given level of risk
B. The set of portfolios with the lowest level of risk
C. The set of portfolios with the highest level of risk
D. The portfolios with the highest dividend yield
________________________________________
229. A company’s cost of capital is generally lower when:
A. It has a high debt-to-equity ratio
B. It has a low debt-to-equity ratio
C. It is highly leveraged
D. It has a higher level of dividends
230. The capital asset pricing model (CAPM) is used to determine:
A. The risk-free rate of return
B. The required rate of return on an asset based on its risk
C. The market value of a company
D. The intrinsic value of a bond
________________________________________
231. In a high inflation environment, a firm’s cost of capital is likely to:
A. Decrease
B. Remain the same
C. Increase
D. Become irrelevant
________________________________________
232. The earnings before interest and taxes (EBIT) margin is a measure of:
A. A firm’s profitability relative to its assets
B. A firm’s cost of capital
C. A firm’s profitability relative to its sales
D. A firm’s ability to cover its interest payments
________________________________________
233. The bond yield to maturity (YTM) is:
A. The coupon rate of the bond
B. The total interest payments made to the bondholder
C. The rate of return an investor can expect to earn if the bond is held to maturity
D. The current market price of the bond
________________________________________
234. A project’s payback period is the time required to:
A. Recover the initial investment from the project’s cash inflows
B. Calculate the project’s NPV
C. Estimate the internal rate of return
D. Assess the project’s risk
________________________________________
235. The price of a bond will decrease if:
A. Interest rates decrease
B. Interest rates increase
C. The bond’s maturity is shortened
D. The bond’s coupon rate decreases
________________________________________
236. The term “financial leverage” refers to:
A. The use of debt to finance a company’s operations
B. The amount of equity used to finance a company’s operations
C. The use of equity to reduce a company’s risk
D. The ratio of dividends to net income
________________________________________
237. The weighted average cost of capital (WACC) is most useful for:
A. Evaluating the profitability of individual investments
B. Estimating the firm’s overall cost of financing
C. Determining the cost of equity capital
D. Calculating the risk-free rate
________________________________________
238. The Gordon Growth Model assumes that:
A. Dividends will grow at a constant rate indefinitely
B. Dividends will remain constant forever
C. The stock price is a function of the firm’s assets
D. The firm will not pay any dividends
________________________________________
239. A company is considering a project with an initial investment of $500,000 and expected annual cash inflows of $100,000 for 6 years. If the required rate of return is 12%, what is the NPV of the project?
A. $54,015
B. $41,500
C. $76,205
D. $60,000
________________________________________
240. The systematic risk of a portfolio is measured by:
A. The portfolio’s standard deviation
B. The portfolio’s beta coefficient
C. The portfolio’s total return
D. The portfolio’s expected cash flows
________________________________________
241. A firm’s capital budgeting decisions are most directly influenced by:
A. Its current profitability
B. The firm’s stock price
C. The firm’s cost of capital
D. The firm’s tax rate
________________________________________
242. The dividend yield is calculated by:
A. Dividing dividends by the stock price
B. Dividing the stock price by the dividends
C. Multiplying dividends by the stock price
D. Subtracting dividends from the stock price
________________________________________
243. The risk-free rate is typically represented by:
A. The return on government bonds
B. The return on corporate bonds
C. The return on stocks
D. The return on savings accounts
________________________________________
244. Which of the following is an example of an operating activity on a cash flow statement?
A. Borrowing funds from a bank
B. Issuing stock
C. Paying interest on debt
D. Selling investments
________________________________________
245. A firm’s inventory turnover ratio is used to measure:
A. The firm’s ability to meet its short-term liabilities
B. The firm’s ability to sell its inventory quickly
C. The firm’s efficiency in managing its receivables
D. The firm’s profitability relative to its assets
________________________________________
246. The capital budgeting method that takes into account the time value of money is:
A. Payback period
B. Internal rate of return (IRR)
C. Accounting rate of return
D. Net present value (NPV)
________________________________________
247. The internal rate of return (IRR) is the rate at which:
A. The NPV of a project equals the initial investment
B. The project’s total costs exceed total revenues
C. The project’s cash inflows equal cash outflows
D. The project’s risk is zero
________________________________________
248. The price-to-book (P/B) ratio is used to:
A. Evaluate a firm’s profitability
B. Determine if a stock is overvalued or undervalued
C. Measure the firm’s financial leverage
D. Calculate the firm’s dividend yield
________________________________________
249. The net working capital (NWC) of a firm is calculated by:
A. Subtracting current liabilities from current assets
B. Adding current liabilities to current assets
C. Subtracting current assets from total assets
D. Adding long-term liabilities to current assets
250. The net present value (NPV) rule suggests that a project should be accepted if:
A. The NPV is positive
B. The NPV is negative
C. The NPV is zero
D. The internal rate of return (IRR) exceeds the required rate of return
________________________________________
251. The price of a bond is inversely related to:
A. The coupon rate
B. The market interest rate
C. The bond’s maturity
D. The company’s earnings
________________________________________
252. The primary goal of financial management is to:
A. Maximize the firm’s profits
B. Minimize costs
C. Maximize shareholder wealth
D. Increase the company’s market share
________________________________________
253. If a firm is operating at a loss, its return on equity (ROE) will:
A. Increase
B. Decrease
C. Remain unchanged
D. Become negative
________________________________________
254. The dividend discount model (DDM) assumes that dividends will grow at a constant rate forever. What is the implication of this assumption for the valuation of a stock?
A. The stock price will remain stable
B. The stock price will increase indefinitely
C. The stock price will decrease indefinitely
D. The stock price is based on the present value of future dividends
________________________________________
255. Which of the following is a characteristic of a bond with a high credit rating?
A. Higher yield
B. Lower yield
C. Higher price volatility
D. Lower price volatility
________________________________________
256. The payback period of a project refers to the time required to:
A. Pay off the project’s initial investment
B. Recover the project’s net present value
C. Calculate the internal rate of return
D. Achieve the project’s target profit
________________________________________
257. A company’s weighted average cost of capital (WACC) is calculated as a weighted average of the costs of:
A. Debt, equity, and retained earnings
B. Debt, equity, and preferred stock
C. Debt, bonds, and equity
D. Long-term and short-term debt
________________________________________
258. In portfolio theory, diversification helps to reduce:
A. Systematic risk
B. Unsystematic risk
C. Total risk
D. Market risk
________________________________________
259. The dividend yield is calculated by:
A. Dividing dividends by the market price of the stock
B. Dividing the market price of the stock by dividends
C. Dividing earnings by the market price of the stock
D. Dividing dividends by earnings
________________________________________
260. If a company’s debt ratio increases, it is likely that:
A. The company’s financial risk has decreased
B. The company’s financial risk has increased
C. The company’s cost of equity has decreased
D. The company’s cost of capital has decreased
________________________________________
261. The capital budgeting method that ranks projects based on the ratio of discounted benefits to discounted costs is called:
A. Payback period
B. Internal rate of return (IRR)
C. Profitability index
D. Net present value (NPV)
________________________________________
262. The yield to maturity (YTM) of a bond represents:
A. The current market price of the bond
B. The annual coupon payments
C. The total return an investor can expect if the bond is held until maturity
D. The yield earned on the bond if it is sold before maturity
________________________________________
263. The degree of operating leverage (DOL) measures:
A. The sensitivity of a firm’s operating income to changes in sales
B. The firm’s financial risk
C. The sensitivity of a firm’s earnings to interest rate changes
D. The return on the firm’s assets
________________________________________
264. If a company’s stock price increases while its earnings remain unchanged, the price-to-earnings (P/E) ratio will:
A. Increase
B. Decrease
C. Stay the same
D. Become negative
________________________________________
265. The capital structure theory that suggests there is an optimal mix of debt and equity that minimizes a firm’s overall cost of capital is called:
A. The pecking order theory
B. The trade-off theory
C. The signaling theory
D. The market timing theory
________________________________________
266. A company’s cost of equity can be estimated using the:
A. Dividend discount model (DDM)
B. Price-to-earnings ratio
C. Weighted average cost of capital (WACC)
D. Capital asset pricing model (CAPM)
________________________________________
267. The operating cycle of a firm is the time between:
A. Purchasing inventory and collecting cash from sales
B. Selling assets and collecting cash
C. Raising capital and investing in projects
D. Paying off liabilities and distributing dividends
________________________________________
268. The concept of risk-adjusted return involves:
A. Comparing a firm’s return to its financial risk
B. Adjusting the return for the firm’s volatility relative to the market
C. Estimating the market value of a firm’s equity
D. Evaluating a firm’s return based on its total assets
________________________________________
269. Which of the following statements is true regarding preferred stock?
A. Preferred stockholders have voting rights
B. Preferred stock has a fixed dividend that must be paid before common stock dividends
C. Preferred stock has a higher claim on assets than debt holders
D. Preferred stock is classified as a liability on the balance sheet
270. The price-to-earnings (P/E) ratio is used to assess:
A. A company’s profitability
B. The market value of a company’s stock relative to its earnings
C. A company’s return on assets
D. The financial risk of a company
________________________________________
271. The primary reason for a company to issue debt rather than equity is:
A. To reduce financial leverage
B. To avoid paying dividends
C. To avoid ownership dilution
D. To lower the cost of capital
________________________________________
272. A project with a higher internal rate of return (IRR) than the required rate of return:
A. Should be rejected
B. Should be accepted
C. Indicates a higher risk
D. Indicates a negative net present value (NPV)
________________________________________
273. The duration of a bond is best described as:
A. The time until the bond matures
B. The time it takes for the bond’s price to change in response to interest rate changes
C. The bond’s yield to maturity
D. The bond’s average life, weighted by the present value of its cash flows
________________________________________
274. A bond’s coupon rate is the:
A. Yield to maturity of the bond
B. Percentage of the face value that the bondholder receives as interest annually
C. Rate at which the bond’s price is expected to grow
D. Rate at which the bond’s price fluctuates in the market
________________________________________
275. The market risk premium is the difference between:
A. The risk-free rate and the rate of return on the market portfolio
B. The required return on a stock and the risk-free rate
C. The rate of return on a stock and the expected rate of return
D. The required return on a stock and the return on a Treasury bond
________________________________________
276. In the capital asset pricing model (CAPM), the expected return on a security is determined by:
A. The risk-free rate, the security’s beta, and the market return
B. The company’s dividend yield
C. The company’s earnings growth rate
D. The firm’s cost of debt
________________________________________
277. The quick ratio is an indicator of:
A. A company’s ability to meet its short-term obligations with its most liquid assets
B. A company’s profitability relative to its assets
C. The efficiency of a company’s inventory management
D. The company’s ability to pay dividends to shareholders
________________________________________
278. The cost of equity can be determined using:
A. The weighted average cost of capital (WACC)
B. The dividend discount model (DDM)
C. The market capitalization rate
D. The net present value (NPV) rule
________________________________________
279. A company’s capital budgeting decision should focus on:
A. Maximizing short-term profits
B. Maximizing the firm’s net present value (NPV)
C. Minimizing the firm’s debt ratio
D. Maximizing stockholder dividends
________________________________________
280. A project’s net present value (NPV) is positive when:
A. The project’s internal rate of return (IRR) is greater than the required rate of return
B. The project’s IRR is less than the required rate of return
C. The project’s cash inflows exceed the initial investment
D. The project’s cash inflows are discounted at the cost of equity
________________________________________
281. The basic assumption of the dividend discount model (DDM) is that:
A. The company’s earnings will grow at a constant rate indefinitely
B. The company will pay no dividends in the future
C. The company’s stock price will grow at a constant rate
D. The company’s dividend payments will be constant forever
________________________________________
282. The cost of capital for a firm is:
A. The return the firm must earn on its investments to maintain its market value
B. The cost of debt issued by the firm
C. The cost of equity capital for the firm
D. The total cost of financing, including both debt and equity
________________________________________
283. The weighted average cost of capital (WACC) is the:
A. Average cost of the firm’s equity and debt capital, weighted by their proportions in the capital structure
B. Rate at which the firm’s debt is issued
C. Cost of issuing new equity
D. Return the firm needs to generate to pay off its debt
________________________________________
284. The business risk of a firm is primarily determined by:
A. The firm’s debt ratio
B. The firm’s operating income
C. The firm’s capital structure
D. The firm’s industry and market conditions
________________________________________
285. A firm’s operating leverage is the degree to which:
A. The firm’s profits are sensitive to changes in sales
B. The firm’s earnings are sensitive to interest rate changes
C. The firm’s debt load impacts its financial risk
D. The firm’s cash flows can be managed through inventory control
________________________________________
286. A company’s debt ratio is calculated by:
A. Dividing total liabilities by total assets
B. Dividing total equity by total liabilities
C. Dividing total assets by total liabilities
D. Dividing net income by total assets
________________________________________
287. The price of a bond is determined by:
A. The current market interest rate and the bond’s coupon rate
B. The current interest rate of the firm issuing the bond
C. The company’s earnings potential
D. The amount of interest the bondholder will receive annually
________________________________________
288. A firm’s capital budgeting decision process involves:
A. Deciding how to allocate its available capital among competing projects
B. Determining how much debt to issue
C. Deciding whether to pay dividends or reinvest earnings
D. Deciding whether to issue new equity
________________________________________
289. Which of the following is NOT a reason for using financial leverage?
A. To increase potential return on equity
B. To reduce the cost of equity
C. To increase financial risk
D. To increase the firm’s operational efficiency
290. A firm’s cost of equity can be estimated using:
A. The dividend discount model
B. The net present value method
C. The internal rate of return
D. The modified internal rate of return
________________________________________
291. In the context of capital budgeting, the payback period refers to:
A. The length of time it takes for a project to generate cash flows equal to its initial investment
B. The time it takes to recover the cost of capital
C. The period during which the firm must wait before starting the project
D. The time it takes for the company to realize its return on equity
________________________________________
292. The Modigliani-Miller theorem suggests that in a perfect market, the value of a firm is:
A. Affected by its capital structure
B. Independent of its capital structure
C. Maximized when it uses 100% equity financing
D. Maximized when it uses 100% debt financing
________________________________________
293. A firm’s debt-to-equity ratio is:
A. The proportion of debt in its capital structure relative to equity
B. The total liabilities of the firm divided by its total assets
C. The total assets of the firm divided by its total liabilities
D. The total equity of the firm divided by its total liabilities
________________________________________
294. The yield to maturity (YTM) of a bond is the:
A. Current interest rate on the bond’s coupon payments
B. Discount rate that equates the present value of the bond’s cash flows to its current price
C. Rate at which the bondholder can sell the bond in the market
D. Rate at which the bond’s price will increase over time
________________________________________
295. The debt service coverage ratio (DSCR) measures:
A. A firm’s ability to meet its interest and principal repayment obligations
B. The firm’s ability to pay dividends to shareholders
C. The firm’s profitability in relation to its debt
D. The firm’s total liabilities compared to its equity
________________________________________
296. The degree of financial leverage (DFL) is defined as:
A. The percentage change in earnings per share (EPS) for a given percentage change in sales
B. The change in net income in response to changes in interest rates
C. The change in dividends in response to changes in operating costs
D. The percentage change in revenue for a given change in fixed costs
________________________________________
297. The weighted average cost of capital (WACC) is used to:
A. Discount future cash flows in project valuation
B. Measure the risk of a specific investment
C. Calculate the future value of a bond
D. Estimate the firm’s overall profitability
________________________________________
298. A company with high operating leverage will likely experience:
A. Smaller fluctuations in profit as sales change
B. Larger fluctuations in profit as sales change
C. A higher risk of bankruptcy
D. A low cost of capital
________________________________________
299. In the capital asset pricing model (CAPM), the beta coefficient measures:
A. The sensitivity of a stock’s returns to changes in the market return
B. The stock’s dividend yield relative to the market
C. The return on the stock relative to the risk-free rate
D. The expected return on the stock relative to the company’s earnings growth
________________________________________
300. A firm’s dividend payout ratio is calculated by:
A. Dividing total dividends by net income
B. Dividing net income by total equity
C. Dividing total dividends by total assets
D. Dividing earnings per share by stock price
________________________________________
301. The concept of “economic value added” (EVA) is used to:
A. Determine the firm’s profitability relative to its total capital
B. Measure the firm’s operating cash flow
C. Estimate the growth rate of a firm’s earnings
D. Evaluate the effectiveness of a firm’s dividend policy
________________________________________
302. In financial analysis, “liquidity risk” refers to:
A. The risk that a firm will be unable to meet its short-term obligations
B. The risk of changes in market interest rates
C. The risk that a firm’s stock price will decline
D. The risk of an economic recession
________________________________________
303. The capital asset pricing model (CAPM) assumes that all investors:
A. Have different risk preferences
B. Hold diversified portfolios
C. Have access to insider information
D. Have unlimited access to credit
________________________________________
304. The net present value (NPV) method assumes that:
A. The firm’s cost of capital remains constant over time
B. Cash flows are reinvested at the internal rate of return (IRR)
C. Cash flows are reinvested at the cost of capital
D. The future cash flows are risk-free
________________________________________
305. In the context of bond pricing, a bond is considered to be trading at a premium when:
A. Its market price is below its face value
B. Its market price is equal to its face value
C. Its market price is above its face value
D. It is not paying any coupon interest
________________________________________
306. The principal objective of the capital budgeting process is to:
A. Maximize the firm’s market share
B. Minimize the firm’s cost of capital
C. Maximize the firm’s long-term profitability and shareholder value
D. Ensure the firm maintains adequate cash reserves
________________________________________
307. The dividend discount model (DDM) is most appropriate for:
A. Valuing companies with unpredictable earnings
B. Companies that pay regular and stable dividends
C. Companies that do not pay dividends
D. Startups with high growth rates
308. The efficient market hypothesis (EMH) suggests that:
A. Stock prices are always overvalued
B. Stock prices reflect all available information
C. Markets always overreact to news
D. Stock prices are unpredictable due to random behavior
________________________________________
309. Which of the following is most likely to be a characteristic of a firm with a high degree of operating leverage?
A. It has a low proportion of fixed costs in its cost structure
B. Its profitability is highly sensitive to changes in sales volume
C. It has low fixed costs and variable costs that fluctuate significantly
D. Its stock price is less volatile compared to other firms
________________________________________
310. Which of the following is a limitation of the internal rate of return (IRR) method for evaluating investments?
A. It assumes that cash flows are reinvested at the cost of capital
B. It can result in multiple IRRs for projects with unconventional cash flows
C. It requires the project’s cost of capital to be constant
D. It does not consider the timing of cash flows
________________________________________
311. The price-to-earnings (P/E) ratio is commonly used to:
A. Assess a company’s debt levels
B. Measure the market’s valuation of a company relative to its earnings
C. Determine the company’s profitability margin
D. Calculate the firm’s dividend payout ratio
________________________________________
312. A bond’s duration measures:
A. The time until the bond matures
B. The bond’s sensitivity to interest rate changes
C. The bond’s coupon payment frequency
D. The amount of interest paid on the bond
________________________________________
313. The capital structure of a company refers to:
A. The distribution of profits between shareholders and bondholders
B. The way a company finances its operations through a mix of debt and equity
C. The company’s dividend policy
D. The management structure within the company
________________________________________
314. The market risk premium in the capital asset pricing model (CAPM) is the:
A. Difference between the expected return on the market and the risk-free rate
B. Rate of return expected from a risk-free investment
C. Risk premium associated with investing in government bonds
D. Difference between a firm’s cost of debt and cost of equity
________________________________________
315. A company with a low current ratio may indicate:
A. High liquidity and low risk of insolvency
B. Low liquidity and potential difficulty in meeting short-term obligations
C. High profitability and strong financial health
D. The company is well capitalized
________________________________________
316. A leveraged buyout (LBO) involves:
A. A company acquiring another company using a significant amount of its own equity capital
B. The purchase of a company using mostly debt financing
C. A merger of two companies in the same industry
D. A company buying back its own shares using retained earnings
________________________________________
317. The key advantage of debt financing over equity financing is that:
A. Debt holders have voting rights in the firm’s management
B. Debt interest is tax-deductible, reducing the firm’s tax liability
C. Equity holders receive priority over debt holders in the case of liquidation
D. Debt financing does not involve any repayment obligations
________________________________________
318. A firm’s weighted average cost of capital (WACC) is most affected by:
A. The firm’s dividend policy
B. The proportion of debt and equity financing used by the firm
C. The market value of the firm’s assets
D. The number of shares outstanding
________________________________________
319. The purpose of the dividend discount model (DDM) is to:
A. Estimate the current value of a firm based on its dividends
B. Calculate the firm’s cost of capital
C. Determine the firm’s overall profitability
D. Predict future dividend payouts
________________________________________
320. When calculating the present value of a bond, which factor has the most significant effect on the bond’s price?
A. The bond’s coupon rate
B. The bond’s maturity date
C. The interest rate in the market (discount rate)
D. The issuer’s credit rating
________________________________________
321. The formula for calculating the dividend payout ratio is:
A. Dividends / Net income
B. Net income / Dividends
C. Dividends / Total equity
D. Total assets / Dividends
________________________________________
322. The price-to-book (P/B) ratio is most useful for evaluating:
A. Growth companies that do not pay dividends
B. Firms with significant tangible assets
C. Firms with intangible assets such as goodwill
D. The firm’s market capitalization relative to its sales
________________________________________
323. The efficient frontier in portfolio theory represents:
A. The combination of assets that minimizes risk for a given level of return
B. The highest possible return for a given level of risk
C. The combination of assets that maximizes the risk-return ratio
D. A risk-free portfolio
________________________________________
324. The capital allocation line (CAL) in modern portfolio theory represents:
A. The optimal portfolio of risky assets
B. The trade-off between risk and return for a given set of risky assets
C. The line that represents the risk-free asset in the market
D. The combination of assets that generates the highest return with the lowest risk
________________________________________
325. A higher debt-to-equity ratio typically indicates:
A. A lower level of financial risk
B. A higher level of financial risk due to increased reliance on debt
C. That the firm has a higher liquidity ratio
D. That the firm is generating more income from its equity
________________________________________
326. The net present value (NPV) rule for investment projects suggests that:
A. Projects with a positive NPV should be rejected
B. Projects with a negative NPV should be accepted
C. Projects with a positive NPV should be accepted
D. NPV should be ignored in favor of the internal rate of return (IRR)
327. The primary objective of financial management is to:
A. Maximize shareholder wealth
B. Minimize operational costs
C. Maximize market share
D. Minimize taxes
________________________________________
328. The dividend discount model assumes that:
A. Dividends will grow at a constant rate indefinitely
B. Dividends will decrease over time
C. The firm will not pay dividends
D. The dividends paid will be irregular and unpredictable
________________________________________
329. The cost of equity can be estimated using:
A. The weighted average cost of capital (WACC)
B. The dividend discount model (DDM)
C. The internal rate of return (IRR)
D. The capital asset pricing model (CAPM)
________________________________________
330. The use of debt financing increases the potential risk to shareholders because:
A. Debt holders have priority over shareholders in the event of liquidation
B. Debt payments are fixed, which reduces the company’s financial flexibility
C. The cost of debt is generally lower than the cost of equity
D. Debt financing increases the company’s profitability
________________________________________
331. Which of the following statements about the capital asset pricing model (CAPM) is true?
A. It shows the relationship between the risk of an asset and its expected return
B. It assumes that all investors have the same expectations for returns
C. It does not account for systematic risk
D. It is based on the assumption of a perfectly diversified portfolio
________________________________________
332. In which of the following scenarios would a firm most likely use a stock repurchase plan?
A. When it wants to raise additional capital
B. When it wants to increase its dividends
C. When it believes its stock is undervalued
D. When it needs to reduce its debt levels
________________________________________
333. The efficient frontier is a graphical representation of:
A. The risk-return trade-off of a portfolio
B. The risk-free rate
C. The optimal capital structure for a firm
D. The market value of a portfolio
________________________________________
334. The weighted average cost of capital (WACC) is the:
A. Average interest rate paid on a firm’s debt
B. Discount rate used in net present value (NPV) calculations
C. Average rate of return a company is expected to pay to its investors, weighted by their respective proportions of equity and debt
D. Rate of return on equity capital only
________________________________________
335. The Modigliani-Miller theorem suggests that in perfect markets, the value of a firm:
A. Depends on its capital structure
B. Is unaffected by its capital structure
C. Increases with more debt financing
D. Decreases with more equity financing
________________________________________
336. The capital budgeting process involves:
A. Deciding how to raise funds for a firm
B. Determining the cost of debt and equity capital
C. Evaluating potential investment opportunities to maximize firm value
D. Allocating dividends to shareholders
________________________________________
337. The price-to-sales (P/S) ratio is primarily used for evaluating:
A. The valuation of firms with consistent and stable earnings
B. Firms with irregular earnings or negative earnings
C. Firms with high dividend payouts
D. The cost of capital for firms
________________________________________
338. The main purpose of diversification in a portfolio is to:
A. Maximize the expected return
B. Reduce the portfolio’s risk
C. Minimize the number of assets in the portfolio
D. Increase the portfolio’s liquidity
________________________________________
339. Which of the following is an example of a systematic risk?
A. A company’s poor management decisions
B. A natural disaster affecting a specific region
C. A recession that affects the entire economy
D. A firm’s unexpected earnings announcement
________________________________________
340. The difference between the nominal interest rate and the real interest rate is:
A. The inflation rate
B. The risk premium
C. The tax rate
D. The bond yield
________________________________________
341. The cost of debt is typically lower than the cost of equity because:
A. Debt holders take on more risk than equity holders
B. Debt holders have a claim on the firm’s assets in the event of liquidation
C. Interest payments on debt are tax-deductible
D. Equity investors are more concerned with short-term gains
________________________________________
342. A firm’s liquidity can be assessed using:
A. Return on equity (ROE)
B. The quick ratio
C. The price-to-earnings ratio (P/E)
D. Earnings before interest and taxes (EBIT)
________________________________________
343. The beta coefficient in the capital asset pricing model (CAPM) measures:
A. A stock’s sensitivity to the overall market return
B. The expected return on a stock
C. The amount of risk associated with a stock
D. A stock’s historical volatility
________________________________________
344. The Gordon growth model is used to estimate:
A. The cost of equity
B. The intrinsic value of a stock based on its dividends
C. The weighted average cost of capital
D. The value of a bond
________________________________________
345. In terms of a firm’s capital structure, the trade-off theory suggests that:
A. Firms should rely entirely on debt financing
B. The optimal capital structure balances the tax benefits of debt with the bankruptcy costs of debt
C. There is no benefit to using debt in the capital structure
D. Debt is always less costly than equity
346. The internal rate of return (IRR) is the discount rate that:
A. Maximizes a firm’s profits
B. Makes the net present value (NPV) of a project equal to zero
C. Determines the cost of equity capital
D. Identifies the risk-free rate of return
________________________________________
347. The payback period is the time it takes for an investment to:
A. Recover its initial investment
B. Achieve a positive net present value
C. Pay out dividends
D. Reach its highest market value
________________________________________
348. A firm’s market value is determined by:
A. The value of its assets
B. The price of its stock in the market
C. The interest rates it can access
D. Its debt-to-equity ratio
________________________________________
349. Which of the following is a primary characteristic of preferred stock?
A. It provides voting rights to shareholders
B. It is a form of debt financing
C. It pays fixed dividends before common stock dividends
D. It has a higher risk than common stock
________________________________________
350. The weighted average cost of capital (WACC) is used to evaluate:
A. The cost of debt financing
B. The discount rate for evaluating investment opportunities
C. The risk of a project
D. The return on equity
________________________________________
351. Which of the following methods is most commonly used to determine the value of a bond?
A. Price-to-earnings ratio
B. Dividend discount model
C. Present value of future cash flows
D. Capital asset pricing model
________________________________________
352. A company with a higher beta is expected to:
A. Have lower returns compared to the market
B. Be less volatile than the market
C. Have higher returns due to higher risk
D. Be unaffected by market movements
________________________________________
353. The Modigliani-Miller theorem assumes that:
A. Taxes have no effect on a company’s capital structure
B. The firm’s value is affected by its capital structure
C. Debt financing is riskier than equity financing
D. Firms cannot change their dividend policies
________________________________________
354. The dividend payout ratio is calculated as:
A. Dividends divided by earnings per share
B. Earnings per share divided by dividends
C. Dividends divided by net income
D. Net income divided by total equity
________________________________________
355. Which of the following represents a firm’s cost of equity?
A. The dividend yield
B. The risk-free rate plus the equity risk premium
C. The weighted average cost of capital
D. The return on invested capital
________________________________________
356. If a company is in a high tax bracket, the firm’s cost of debt will:
A. Decrease because interest payments are tax-deductible
B. Increase because of the added cost of taxes
C. Stay the same regardless of the tax rate
D. Become equal to the cost of equity
________________________________________
357. The price-to-earnings (P/E) ratio is used to:
A. Evaluate the risk of a stock
B. Assess the market value of a firm in relation to its earnings
C. Determine the cost of debt for a company
D. Compare the dividends paid by a firm to its earnings
________________________________________
358. The net present value (NPV) rule suggests that:
A. A firm should accept projects with negative NPVs
B. The value of a project is irrelevant to its acceptance
C. A firm should accept projects with positive NPVs
D. Projects with high IRRs should always be accepted
________________________________________
359. The price-to-book (P/B) ratio is used to:
A. Evaluate a company’s dividend policy
B. Determine the market value of a firm’s assets
C. Measure the relationship between a company’s stock price and its book value
D. Assess the risk of a company’s financial leverage
________________________________________
360. The capital structure of a firm refers to:
A. The combination of equity, debt, and other long-term sources of financing used to fund the firm’s operations
B. The allocation of the firm’s capital expenditures
C. The level of cash reserves held by a firm
D. The management of the firm’s short-term assets
________________________________________
361. If a company’s dividend payout ratio increases, it generally means:
A. The company is retaining more earnings for reinvestment
B. The company is distributing more profits to shareholders
C. The company is reducing its debt
D. The company’s stock price will decrease immediately
________________________________________
362. A firm’s operating leverage refers to:
A. The use of debt in its capital structure
B. The firm’s ability to cover its fixed costs with its sales
C. The ratio of long-term debt to equity
D. The firm’s ability to pay dividends
________________________________________
363. Which of the following is the primary purpose of the capital asset pricing model (CAPM)?
A. To determine the optimal capital structure for a firm
B. To estimate the required return on an asset given its risk relative to the market
C. To calculate the total cost of capital
D. To forecast the earnings of a firm
________________________________________
364. The cost of debt is usually lower than the cost of equity because:
A. Debt holders take on more risk than equity holders
B. Debt is senior in claim to equity in case of liquidation
C. Equity is more tax-deductible than debt
D. Equity investors expect higher returns for their higher risk
365. The market risk premium is the difference between:
A. The return on the market portfolio and the risk-free rate
B. The return on the market portfolio and the return on a risk-free asset
C. The risk-free rate and the required return on equity
D. The expected return on a stock and the return on the market
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366. A company’s debt-to-equity ratio is calculated by:
A. Dividing its total assets by total liabilities
B. Dividing its total debt by total equity
C. Dividing its total liabilities by total equity
D. Dividing its net income by total equity
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367. In the Modigliani-Miller theorem with no taxes, the value of a firm is:
A. Higher with more debt in the capital structure
B. Lower with more debt in the capital structure
C. Unaffected by the amount of debt in the capital structure
D. Directly related to the level of equity financing
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368. Which of the following financial statements reflects the company’s profitability over a given period?
A. Balance sheet
B. Income statement
C. Cash flow statement
D. Statement of retained earnings
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369. The main difference between systematic risk and unsystematic risk is that:
A. Systematic risk can be reduced by diversification, but unsystematic risk cannot
B. Unsystematic risk affects the entire market, while systematic risk affects individual companies
C. Systematic risk affects the entire market, while unsystematic risk affects individual companies
D. Systematic risk is associated with interest rates, while unsystematic risk is associated with stock prices
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370. A company’s cost of capital reflects the:
A. Expected return required by investors in all securities
B. Average rate of return required by the company’s debt and equity holders
C. Minimum return the company needs to generate to satisfy its creditors
D. Return on equity less the cost of debt
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371. In a perfectly competitive market, the price of a bond is primarily determined by:
A. The bond’s coupon rate
B. The bond’s yield to maturity
C. The bond’s duration
D. The bond’s current market price
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372. The price-earnings (P/E) ratio is most useful for evaluating:
A. The profitability of a firm
B. The risk of a firm’s stock
C. The valuation of a firm’s stock relative to its earnings
D. The cash flow of a firm
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373. The capital asset pricing model (CAPM) assumes that:
A. All investors have the same expectations about future returns
B. The risk-free rate is always constant
C. All securities are priced efficiently in the market
D. Investors can diversify away all risk
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374. Which of the following actions would increase a company’s earnings per share (EPS)?
A. Issuing more common stock
B. Issuing more debt
C. Buying back shares of common stock
D. Paying a dividend
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375. The yield to maturity (YTM) of a bond is:
A. The current coupon rate of the bond
B. The total return expected if the bond is held until maturity
C. The current market interest rate
D. The difference between the bond’s coupon rate and the risk-free rate
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376. In financial leverage, the degree of financial leverage (DFL) measures:
A. The sensitivity of a company’s earnings before interest and taxes (EBIT) to changes in sales
B. The impact of debt financing on a company’s stock price
C. The sensitivity of a company’s net income to changes in EBIT
D. The risk associated with the company’s use of debt
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377. The price of a call option increases when:
A. The underlying stock price decreases
B. The time to expiration decreases
C. The stock’s volatility decreases
D. The stock’s volatility increases
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378. The efficient market hypothesis (EMH) suggests that:
A. Stocks are always underpriced or overpriced depending on market conditions
B. Stock prices reflect all available information at any given time
C. Market timing can consistently outperform the average market return
D. Investors can consistently achieve superior returns through fundamental analysis
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379. A firm’s operating cycle is:
A. The time taken to produce and sell a product
B. The time between purchasing inventory and receiving cash from sales
C. The time taken to recover a firm’s investment
D. The time between issuing equity and repaying debt
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380. Which of the following is the most appropriate method to evaluate a project’s capital budgeting decision when cash flows are expected to vary over time?
A. Payback period
B. Net present value (NPV)
C. Accounting rate of return (ARR)
D. Internal rate of return (IRR)
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381. The term “diversification” in a portfolio refers to:
A. Spreading investments across different asset classes to reduce risk
B. Focusing all investments in one sector to increase returns
C. Using high-risk assets in the portfolio
D. Taking large positions in foreign stocks
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382. Which of the following is NOT a characteristic of a well-functioning financial market?
A. Liquidity
B. Efficient pricing of securities
C. Restrictions on investor participation
D. Transparency of information
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383. In the case of a stock split, the price per share:
A. Increases, and the number of shares decreases
B. Decreases, and the number of shares increases
C. Increases, and the number of shares increases
D. Decreases, and the number of shares remains unchanged
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384. The primary objective of financial management is:
A. Maximizing profits
B. Maximizing the market value of a company’s stock
C. Minimizing the cost of capital
D. Maximizing earnings before taxes
385. The internal rate of return (IRR) is defined as the:
A. Discount rate that makes the net present value (NPV) equal to zero
B. Rate of return that guarantees a positive NPV
C. Rate at which the total cash flows are equal to the initial investment
D. Discount rate at which the present value of future cash flows exceeds the initial cost
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386. A firm’s weighted average cost of capital (WACC) is calculated by:
A. Taking the average cost of debt and equity without weights
B. Considering the cost of debt and equity, weighted by their proportions in the capital structure
C. Adding the cost of debt and equity together
D. Dividing the total debt by equity in the capital structure
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387. In the context of the efficient frontier in portfolio theory, a portfolio that lies on the frontier:
A. Has the highest expected return for a given level of risk
B. Has the highest risk for a given level of return
C. Has the lowest risk for a given level of return
D. Is completely risk-free
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388. A firm’s dividend payout ratio is defined as:
A. The amount of cash paid to shareholders divided by net income
B. The total dividends paid divided by the number of shares outstanding
C. The market value of dividends relative to stock price
D. The total dividends paid divided by total debt
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389. In the Capital Asset Pricing Model (CAPM), the expected return on a stock is:
A. Equal to the risk-free rate plus the stock’s beta times the market risk premium
B. Equal to the risk-free rate plus the stock’s price-to-earnings ratio
C. Equal to the risk-free rate plus the stock’s standard deviation
D. Equal to the stock’s current dividend yield plus market risk premium
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390. Which of the following is an example of an unsystematic risk?
A. Interest rate fluctuations
B. Changes in government policies
C. Changes in a company’s management
D. Inflationary pressures
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391. The purpose of diversification in an investment portfolio is to:
A. Maximize returns by investing in high-risk assets
B. Minimize the overall risk of the portfolio
C. Ensure the portfolio only holds low-risk assets
D. Increase the liquidity of the portfolio
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392. Which of the following is an example of systematic risk?
A. A firm’s production costs increase
B. A firm faces a lawsuit from an employee
C. The overall stock market experiences a downturn
D. A company introduces a new product
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393. If the price of a bond is above its face value, the bond is:
A. Trading at a discount
B. Trading at par
C. Trading at a premium
D. Trading at a loss
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394. In a perfect market with no taxes, Modigliani and Miller argue that:
A. The value of a firm is dependent on its capital structure
B. The value of a firm is unaffected by its capital structure
C. Debt financing is always superior to equity financing
D. Firms should avoid using debt in their capital structure
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395. The cost of debt is generally lower than the cost of equity because:
A. Debt is riskier for investors than equity
B. Debt payments are tax-deductible
C. Equity investors are guaranteed a return before debt holders
D. Debt holders bear more risk than equity holders
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396. Which of the following is NOT a feature of preferred stock?
A. It typically pays a fixed dividend
B. It has voting rights in the company
C. It is senior to common stock in the payment of dividends
D. It can be convertible into common stock
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397. In the context of project evaluation, the net present value (NPV) rule suggests that:
A. Projects should be accepted if the NPV is negative
B. Projects should be accepted if the NPV is positive
C. Projects should be accepted if the NPV equals zero
D. Projects should always be accepted regardless of NPV
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398. The dividend discount model (DDM) is used to estimate:
A. The price of a bond
B. The price of a stock based on its future dividends
C. The cost of equity
D. The net present value of a project
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399. A company’s capital structure refers to the:
A. Ratio of debt to equity financing
B. Amount of equity capital held by shareholders
C. Debt repayment schedule
D. Structure of the company’s financial statements
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400. The price of a put option increases when:
A. The underlying stock price rises
B. The time to expiration increases
C. The stock price volatility decreases
D. The stock’s dividend yield decreases
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401. A company’s cost of equity can be estimated using:
A. The dividend discount model (DDM)
B. The yield to maturity of the firm’s bonds
C. The firm’s book value of equity
D. The average cost of debt in the firm’s capital structure
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402. In the context of financial markets, liquidity refers to:
A. The amount of debt a firm has in its capital structure
B. The ability to quickly buy or sell an asset without affecting its price
C. The amount of cash flow a firm generates
D. The profitability of a firm’s operations
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403. The primary advantage of using debt in a firm’s capital structure is:
A. It increases the firm’s equity base
B. Debt holders are paid only after equity holders
C. Debt financing is less expensive than equity financing
D. The firm can avoid paying taxes
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404. A company is most likely to issue bonds instead of equity when:
A. The company has high growth opportunities
B. The company has significant debt capacity and lower equity financing costs
C. The stock market is volatile
D. The company is in financial distress