Solution Manual for Principles of
Corporate Finance 14th Edition
1. What is the primary goal of financial management?
A. Maximizing sales
B. Maximizing profits
C. Maximizing shareholder wealth
D. Minimizing costs
Answer: C. Maximizing shareholder wealth
2. The net present value (NPV) of a project is the:
A. Difference between the future value of the cash inflows and outflows.
B. Difference between the present value of cash inflows and outflows.
C. Sum of the cash inflows and outflows.
D. Average of the cash inflows and outflows.
Answer: B. Difference between the present value of cash inflows and outflows.
3. In the Capital Asset Pricing Model (CAPM), the expected return on a stock is a
function of:
A. Risk-free rate, market risk premium, and stock's beta.
,B. Risk-free rate, market return, and stock's dividend.
C. Stock's beta, market return, and company's earnings.
D. Risk-free rate, stock's earnings, and market risk premium.
Answer: A. Risk-free rate, market risk premium, and stock's beta.
4. Which of the following is NOT a component of the Weighted Average Cost of
Capital (WACC)?
A. Cost of equity
B. Cost of debt
C. Cost of preferred stock
D. Cost of inventory
Answer: D. Cost of inventory
5. The Dividend Discount Model (DDM) assumes that dividends:
A. Grow at a constant rate.
B. Remain constant.
C. Grow at a rate that depends on the inflation rate.
D. Will decrease over time.
Answer: A. Grow at a constant rate.
,6. Which of the following is the most accurate measure of a firm's profitability?
A. Gross profit margin
B. Operating profit margin
C. Return on equity (ROE)
D. Return on assets (ROA)
Answer: C. Return on equity (ROE)
7. The primary difference between debt and equity financing is:
A. Debt financing involves ownership claims, while equity financing does not.
B. Debt financing must be repaid, while equity financing does not.
C. Equity financing is tax-deductible, while debt financing is not.
D. Debt financing has no effect on a firm's capital structure, while equity financing
does.
Answer: B. Debt financing must be repaid, while equity financing does not.
8. What is the purpose of the internal rate of return (IRR) rule?
A. To evaluate the cost of financing for a project.
B. To compare the profitability of different investment opportunities.
, C. To determine the minimum acceptable return on an investment.
D. To assess the value of a project by comparing it to the cost of capital.
Answer: D. To assess the value of a project by comparing it to the cost of capital.
9. The term "liquidity" refers to:
A. The ability of a company to pay its short-term obligations.
B. The profitability of a company's operations.
C. The amount of cash a company has on hand.
D. The company's ability to generate cash from its investments.
Answer: A. The ability of a company to pay its short-term obligations.
10. In the context of financial markets, "market efficiency" means:
A. All investors have access to the same information.
B. Security prices reflect all available information.
C. The stock market is free from government regulation.
D. All investors will earn the same return on their investments.
Answer: B. Security prices reflect all available information.
11. The price-to-earnings (P/E) ratio is calculated as:
Corporate Finance 14th Edition
1. What is the primary goal of financial management?
A. Maximizing sales
B. Maximizing profits
C. Maximizing shareholder wealth
D. Minimizing costs
Answer: C. Maximizing shareholder wealth
2. The net present value (NPV) of a project is the:
A. Difference between the future value of the cash inflows and outflows.
B. Difference between the present value of cash inflows and outflows.
C. Sum of the cash inflows and outflows.
D. Average of the cash inflows and outflows.
Answer: B. Difference between the present value of cash inflows and outflows.
3. In the Capital Asset Pricing Model (CAPM), the expected return on a stock is a
function of:
A. Risk-free rate, market risk premium, and stock's beta.
,B. Risk-free rate, market return, and stock's dividend.
C. Stock's beta, market return, and company's earnings.
D. Risk-free rate, stock's earnings, and market risk premium.
Answer: A. Risk-free rate, market risk premium, and stock's beta.
4. Which of the following is NOT a component of the Weighted Average Cost of
Capital (WACC)?
A. Cost of equity
B. Cost of debt
C. Cost of preferred stock
D. Cost of inventory
Answer: D. Cost of inventory
5. The Dividend Discount Model (DDM) assumes that dividends:
A. Grow at a constant rate.
B. Remain constant.
C. Grow at a rate that depends on the inflation rate.
D. Will decrease over time.
Answer: A. Grow at a constant rate.
,6. Which of the following is the most accurate measure of a firm's profitability?
A. Gross profit margin
B. Operating profit margin
C. Return on equity (ROE)
D. Return on assets (ROA)
Answer: C. Return on equity (ROE)
7. The primary difference between debt and equity financing is:
A. Debt financing involves ownership claims, while equity financing does not.
B. Debt financing must be repaid, while equity financing does not.
C. Equity financing is tax-deductible, while debt financing is not.
D. Debt financing has no effect on a firm's capital structure, while equity financing
does.
Answer: B. Debt financing must be repaid, while equity financing does not.
8. What is the purpose of the internal rate of return (IRR) rule?
A. To evaluate the cost of financing for a project.
B. To compare the profitability of different investment opportunities.
, C. To determine the minimum acceptable return on an investment.
D. To assess the value of a project by comparing it to the cost of capital.
Answer: D. To assess the value of a project by comparing it to the cost of capital.
9. The term "liquidity" refers to:
A. The ability of a company to pay its short-term obligations.
B. The profitability of a company's operations.
C. The amount of cash a company has on hand.
D. The company's ability to generate cash from its investments.
Answer: A. The ability of a company to pay its short-term obligations.
10. In the context of financial markets, "market efficiency" means:
A. All investors have access to the same information.
B. Security prices reflect all available information.
C. The stock market is free from government regulation.
D. All investors will earn the same return on their investments.
Answer: B. Security prices reflect all available information.
11. The price-to-earnings (P/E) ratio is calculated as:
