Investment and Financing Decisions: Master Capital Budgeting and Cost of Capital

Question 1

Which of the following is **not** a benefit of capital budgeting?

Accepted Answer

Guarantees adequate funding for all projects

Answer

Provides a framework for evaluating investment proposals

Answer

Improves financial decision-making

Answer

Identifies potential risks and uncertainties

Question 2

The payback period method of capital budgeting, in contrast to other methods:

Accepted Answer

Solely considers the time it takes to recover the initial investment

Answer

Takes into account the time value of money

Answer

Is a risk-adjusted method

Answer

Provides the most accurate estimate of profitability

Question 3

Which of the following statements accurately defines the weighted average cost of capital (WACC)?

Accepted Answer

The overall cost of financing a project, encompassing both debt and equity

Answer

The cost of acquiring debt financing

Answer

The cost of issuing equity shares

Answer

The return expected by investors

Question 4

Identify the below source of financing as either short-term or long-term: Equity shares

Accepted Answer

Long-term

Answer

Short-term

Question 5

Which of the following statements describes financial leverage?

Accepted Answer

The use of debt to potentially increase the return on equity

Answer

The use of cash to reduce debt costs

Answer

The use of equity to reduce capital costs

Answer

The use of assets as collateral for loans

Question 6

Identify one advantage associated with debt financing:

Accepted Answer

Tax savings on interest payments

Answer

Increased financial flexibility

Answer

No dilution of ownership

Answer

Lower cost of capital compared to equity

Question 7

Which of the following refers to the proportion of debt and equity in a firm's financing structure?

Accepted Answer

Capital structure

Answer

Total capital investment

Answer

Current ratio

Answer

Profitability

Question 8

What is the primary purpose of the discounted cash flow (DCF) technique?

Accepted Answer

Evaluating the net present value (NPV) and internal rate of return (IRR) of an investment

Answer

Determining the payback period of an investment

Answer

Calculating the cost of capital

Answer

Assessing the risk of an investment

Question 9

What is the purpose of conducting a sensitivity analysis in investment appraisal?

Accepted Answer

To assess the impact of changes in input variables on the investment's NPV and IRR

Answer

To identify the most optimistic scenario for an investment

Answer

To reduce the risk associated with an investment without considering the actual result

Answer

To determine the minimum acceptable rate of return

Question 10

Which of the following is NOT a legitimate reason for a firm to invest in capital projects?

Accepted Answer

Speculation

Answer

Expansion of operations

Answer

Replacement of outdated equipment

Answer

Increased efficiency

Question 11

Which of the following is a quantitative technique used in capital budgeting that calculates the discounted present value of future cash flows?

Accepted Answer

Net Present Value

Answer

Payback Period

Answer

Profitability Index

Answer

Return on Investment

Question 12

Which factor does NOT influence the cost of equity?

Accepted Answer

Debt-to-asset ratio

Answer

Risk-free rate

Answer

Market risk premium

Answer

Growth rate of the firm

Question 13

The capital structure of a firm refers to:

Accepted Answer

The proportion of debt and equity financing in its capital mix

Answer

The total amount of capital employed by the firm

Answer

The types of assets owned by the firm

Answer

The sources of financing used by the firm

Question 14

Which financing option usually carries the highest cost of capital?

Accepted Answer

Equity financing

Answer

Retained earnings

Answer

Debt financing

Answer

Short-term loan

Question 15

A primary advantage of utilizing debt financing is:

Accepted Answer

Tax-deductibility of interest payments

Answer

Increased operational flexibility

Answer

Enhanced financial leverage

Answer

Improved creditworthiness

Question 16

Which of the following financial ratios is commonly used to measure a company's ability to meet its short-term obligations?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Interest coverage ratio

Answer

Gross profit margin

Question 17

The formula for calculating the Net Present Value (NPV) of a project is:

Accepted Answer

Present value of future cash flows - (Initial investment)

Answer

Initial investment - (Present value of future cash flows)

Answer

Future cash flows - (Initial investment)

Answer

Initial investment + (Present value of future cash flows)

Question 18

Identify the option that is NOT a recognized capital budgeting technique.

Accepted Answer

Depreciation

Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Question 19

Define the concept of cost of capital.

Accepted Answer

The weighted average cost of a company's debt and equity financing

Answer

The interest rate at which a company acquires debt financing

Answer

The rate of return expected by equity investors

Answer

The cost of capital invested in a specific project

Question 20

Which of the following factors is NOT taken into account when evaluating an investment project using the net present value (NPV) method?

Accepted Answer

Sensitivity to changes in assumptions

Answer

Initial investment outlay

Answer

Projected cash flows

Answer

Cost of capital

Question 21

State the primary purpose of conducting a sensitivity analysis in a capital budgeting project.

Accepted Answer

To assess how changes in critical assumptions impact project profitability

Answer

To determine the project's payback period

Answer

To calculate the project's internal rate of return

Answer

To evaluate the project's risk profile

Question 22

Which of the following is NOT a commonly used capital budgeting technique?

Accepted Answer

Cost-benefit analysis

Answer

Payback period

Answer

Internal rate of return (IRR)

Answer

Net present value (NPV)

Question 23

What is the primary reason for calculating the cost of capital?

Accepted Answer

To determine the minimum acceptable rate of return on an investment project.

Answer

To calculate the payback period of an investment.

Answer

To assess the risk of an investment.

Question 24

When evaluating investment proposals, which of the following factors is typically NOT a primary consideration?

Accepted Answer

Availability of skilled labor

Answer

Payback period

Answer

Net present value

Question 25

What is the fundamental difference between debt financing and equity financing?

Accepted Answer

Debt financing involves borrowing money, creating a liability, while equity financing involves selling ownership in the company, increasing equity.

Answer

Debt financing is generally more expensive than equity financing.

Question 26

What is the main purpose of a financial feasibility study?

Accepted Answer

To assess the financial viability of an investment proposal, determining if it is likely to be profitable.

Answer

To evaluate the environmental impact of an investment proposal.

Answer

To determine the marketing potential of an investment proposal.

Question 27

Which of the following is NOT typically considered a source of long-term financing?

Accepted Answer

Trade credit

Answer

Equity

Answer

Loans

Answer

Bonds

Question 28

What is the primary difference between a bond and a loan?

Accepted Answer

A bond is a type of debt security issued by a company or government that represents a loan to the issuer, while a loan is a direct debt owed to a lender, typically a bank or financial institution.

Answer

Bonds are generally more expensive than loans due to their greater risk and liquidity.