Financial Management – Multiple Choice Questions (MCQ) Exam: Fundamentals, Investment,
Capital Budgeting & Risk
Regarding financial resources, financial management is concerned with the efficiency and
effectiveness of: - ✔✔The acquisition of financial resources as well as the use of financial
resources.
Is balance of payment accounts a financial management tool? - ✔✔No, it is used in
international economics to account for transactions with foreign nations. Not used in financial
management.
Weighted average cost of capital - ✔✔Equal to the cost of each source of capital multiplied by
the percentage of the total capital provided by each source.
How to account for cost of funds when calculating value? - ✔✔E.g., Current value of options is
$1100. But cost of funds is 10%. The current value would then be 1100/1.1 = 1000.
Opportunity Cost - ✔✔Is the discounted dollar value of benefits lost from an opportunity
(alternative) as a result of choosing another opportunity. An opportunity does not involve an
actual transaction or cash outlay.
Does income approach convert future amounts to current amounts? - ✔✔Yes, converting
future amounts to current amounts is an income approach to determining fair value under the
US GAAP framework. The use of discounted cash flows to determine the current value of those
flows is an example of the income approach to determining fair value.
In valuing a specific item, would location or condition be taken into account? - ✔✔Yes, both
location and condition would be taken into account.
Annuity Due - ✔✔A series of equal payments the first of which is due at the inception of the
agreement.
, Effective Annual Interest Rate Formula - ✔✔EAPR = [ 1 + (stated rate / # of period) ] ^(# of
periods) - 1
What category of risk does an investment's beta measure? - ✔✔The investment's systematic
risk.
It shows how the value of an investment changes with changes in the entire class of similar
investments. Systematic risk is the uncertainty inherent in the entire market. It cannot be
avoided through diversification.
A contract executed on an exchange that requires the holder to purchase or sell a specific
quantity of an asset on a future data is most likely a: - ✔✔Futures contract.
Forward contract - ✔✔Are not executed on an exchange but between two contracting parties.
Both forward and futures contracts require the holder to purchase or sell a specific quantity of
an asset on a specific future date.
What are incremental costs? - ✔✔Costs that are different between two or more alternatives
under consideration.
Which investments could be valued using level 1 inputs of the US GAAP hierarchy of inputs for
determining fair value? - ✔✔Either equity securities or debt securities that are traded in an
active market.
Which levels of the US GAAP hierarchy of inputs used for determining fair value can be based on
inputs not directly observable for the item being valued? - ✔✔Both level 2 and level 3 can
include inputs not directly observable for the item being valued.
Capital Budgeting & Risk
Regarding financial resources, financial management is concerned with the efficiency and
effectiveness of: - ✔✔The acquisition of financial resources as well as the use of financial
resources.
Is balance of payment accounts a financial management tool? - ✔✔No, it is used in
international economics to account for transactions with foreign nations. Not used in financial
management.
Weighted average cost of capital - ✔✔Equal to the cost of each source of capital multiplied by
the percentage of the total capital provided by each source.
How to account for cost of funds when calculating value? - ✔✔E.g., Current value of options is
$1100. But cost of funds is 10%. The current value would then be 1100/1.1 = 1000.
Opportunity Cost - ✔✔Is the discounted dollar value of benefits lost from an opportunity
(alternative) as a result of choosing another opportunity. An opportunity does not involve an
actual transaction or cash outlay.
Does income approach convert future amounts to current amounts? - ✔✔Yes, converting
future amounts to current amounts is an income approach to determining fair value under the
US GAAP framework. The use of discounted cash flows to determine the current value of those
flows is an example of the income approach to determining fair value.
In valuing a specific item, would location or condition be taken into account? - ✔✔Yes, both
location and condition would be taken into account.
Annuity Due - ✔✔A series of equal payments the first of which is due at the inception of the
agreement.
, Effective Annual Interest Rate Formula - ✔✔EAPR = [ 1 + (stated rate / # of period) ] ^(# of
periods) - 1
What category of risk does an investment's beta measure? - ✔✔The investment's systematic
risk.
It shows how the value of an investment changes with changes in the entire class of similar
investments. Systematic risk is the uncertainty inherent in the entire market. It cannot be
avoided through diversification.
A contract executed on an exchange that requires the holder to purchase or sell a specific
quantity of an asset on a future data is most likely a: - ✔✔Futures contract.
Forward contract - ✔✔Are not executed on an exchange but between two contracting parties.
Both forward and futures contracts require the holder to purchase or sell a specific quantity of
an asset on a specific future date.
What are incremental costs? - ✔✔Costs that are different between two or more alternatives
under consideration.
Which investments could be valued using level 1 inputs of the US GAAP hierarchy of inputs for
determining fair value? - ✔✔Either equity securities or debt securities that are traded in an
active market.
Which levels of the US GAAP hierarchy of inputs used for determining fair value can be based on
inputs not directly observable for the item being valued? - ✔✔Both level 2 and level 3 can
include inputs not directly observable for the item being valued.
