©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Financial Analysis Test #1 Practice Q's, Fina 470 - Ch: 3 - Analyzing
Activities, finance 3, FINA 470 - Exam 1, FINA 470 Test 1 Discussion
Questions, Financial Statement Analysis Exam 1, Chapter 3:
Analyzing Financing Activities, Ch. 3 & 4, Finance 4 Practice
Questions and Answers
Capital structure in essence is a firm's mix of *long-term financing*? - Ans:✔✔-*TRUE*
The company cost of capital is the expected rate of return that investors demand from the company's
assets and operations? - Ans:✔✔-*TRUE*
Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,
adjusted for tax savings due to interest payments? - Ans:✔✔-*TRUE*
Apple's weighted-average cost of capital is *lower* than that of Wal-Mart? - Ans:✔✔-*FALSE*
There are two costs of debt finance. The *explicit* cost of debt is the rate of interest that bondholders
demand. But there is also an *implicit* cost, because over-borrowing increases the required rate of
return to equity? - Ans:✔✔-*TRUE*
The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy
all its security holders? - Ans:✔✔-*TRUE*
Page 1/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
If the firm *decreases* its debt ratio (D/E), both the debt and the equity will become more *risky*. The
debtholders and equityholders require a higher return to compensate for the increased risk? - Ans:✔✔-
*FALSE*
The riskiness of equity securities typically *exceeds* that of debt securities for firms? - Ans:✔✔-*TRUE*
Calculation of company costs of capital should be conducted with *market values* whenever possible? -
Ans:✔✔-*TRUE*
As a firm changes to a *higher* debt ratio, debtholders are likely to demand higher rates of return? -
Ans:✔✔-*TRUE*
A firm's cost of capital can be used in valuation of every new project they encounter, regardless of its
risk? - Ans:✔✔-*FALSE*
Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of
return is *greater* than the firm's WACC? - Ans:✔✔-*TRUE*
One way to check the correctness of the expected return on bonds is through the *bond discount*
method? - Ans:✔✔-*FALSE*
The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order
to provide an acceptable return to its security holders? - Ans:✔✔-*TRUE*
Page 2/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward
for safer projects? - Ans:✔✔-*TRUE*
A change in the company's capital structure will change the amount of taxes paid but will *not* change
the WACC? - Ans:✔✔-*FALSE*
*Capital structure* decisions refer to the:
A. dividend yield of the firm's stock
B. blend of equity and debt used by the firm
C. capital gains available on the firm's stock
D. maturity date for the firm's securities - Ans:✔✔-*B*
The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently
completed marketing study for the new product and the possible increase in the sales of a related
product made by Axis are best described (respectively) as:
A. opportunity cost; externality
B. sunk cost; externality
C. externality; cannibalization - Ans:✔✔-*B*
Page 3/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Which of the following is the most appropriate decision rule for *mutually exclusive* projects? -
Ans:✔✔-Accept the project with the *highest NPV* (subject to the condition that its NPV is greater than
0)
*Project Sequencing* is best described as: - Ans:✔✔-An investment in a project today that creates the
opportunity to *invest in other projects in the future*
Which of the following statements about NPV and IRR is *least* accurate?
A. The IRR can be positive even if the NPV is negative
B. When the IRR is equal to the cost of capital, the NPV will be 0
C. The NPV will be positive if the IRR is less than the cost of capital - Ans:✔✔-*C*
Which of the following statements is *least* accurate? The discount payback period:
A. Frequently ignores terminal values
B. Is generally shorter than the regular payback
C. Is the time it takes for the present value of the project's cash inflows to equal the initial cost of the
investment - Ans:✔✔-*B*
Page 4/100
FIRST PUBLISH OCTOBER 2024
Financial Analysis Test #1 Practice Q's, Fina 470 - Ch: 3 - Analyzing
Activities, finance 3, FINA 470 - Exam 1, FINA 470 Test 1 Discussion
Questions, Financial Statement Analysis Exam 1, Chapter 3:
Analyzing Financing Activities, Ch. 3 & 4, Finance 4 Practice
Questions and Answers
Capital structure in essence is a firm's mix of *long-term financing*? - Ans:✔✔-*TRUE*
The company cost of capital is the expected rate of return that investors demand from the company's
assets and operations? - Ans:✔✔-*TRUE*
Weighted-average cost of capital is the expected rate of return on a portfolio of all the firm's securities,
adjusted for tax savings due to interest payments? - Ans:✔✔-*TRUE*
Apple's weighted-average cost of capital is *lower* than that of Wal-Mart? - Ans:✔✔-*FALSE*
There are two costs of debt finance. The *explicit* cost of debt is the rate of interest that bondholders
demand. But there is also an *implicit* cost, because over-borrowing increases the required rate of
return to equity? - Ans:✔✔-*TRUE*
The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy
all its security holders? - Ans:✔✔-*TRUE*
Page 1/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
If the firm *decreases* its debt ratio (D/E), both the debt and the equity will become more *risky*. The
debtholders and equityholders require a higher return to compensate for the increased risk? - Ans:✔✔-
*FALSE*
The riskiness of equity securities typically *exceeds* that of debt securities for firms? - Ans:✔✔-*TRUE*
Calculation of company costs of capital should be conducted with *market values* whenever possible? -
Ans:✔✔-*TRUE*
As a firm changes to a *higher* debt ratio, debtholders are likely to demand higher rates of return? -
Ans:✔✔-*TRUE*
A firm's cost of capital can be used in valuation of every new project they encounter, regardless of its
risk? - Ans:✔✔-*FALSE*
Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of
return is *greater* than the firm's WACC? - Ans:✔✔-*TRUE*
One way to check the correctness of the expected return on bonds is through the *bond discount*
method? - Ans:✔✔-*FALSE*
The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order
to provide an acceptable return to its security holders? - Ans:✔✔-*TRUE*
Page 2/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
When using the WACC as a discount rate, it is often adjusted upward for riskier projects and downward
for safer projects? - Ans:✔✔-*TRUE*
A change in the company's capital structure will change the amount of taxes paid but will *not* change
the WACC? - Ans:✔✔-*FALSE*
*Capital structure* decisions refer to the:
A. dividend yield of the firm's stock
B. blend of equity and debt used by the firm
C. capital gains available on the firm's stock
D. maturity date for the firm's securities - Ans:✔✔-*B*
The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently
completed marketing study for the new product and the possible increase in the sales of a related
product made by Axis are best described (respectively) as:
A. opportunity cost; externality
B. sunk cost; externality
C. externality; cannibalization - Ans:✔✔-*B*
Page 3/100
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Which of the following is the most appropriate decision rule for *mutually exclusive* projects? -
Ans:✔✔-Accept the project with the *highest NPV* (subject to the condition that its NPV is greater than
0)
*Project Sequencing* is best described as: - Ans:✔✔-An investment in a project today that creates the
opportunity to *invest in other projects in the future*
Which of the following statements about NPV and IRR is *least* accurate?
A. The IRR can be positive even if the NPV is negative
B. When the IRR is equal to the cost of capital, the NPV will be 0
C. The NPV will be positive if the IRR is less than the cost of capital - Ans:✔✔-*C*
Which of the following statements is *least* accurate? The discount payback period:
A. Frequently ignores terminal values
B. Is generally shorter than the regular payback
C. Is the time it takes for the present value of the project's cash inflows to equal the initial cost of the
investment - Ans:✔✔-*B*
Page 4/100
