,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximizing profits
b) Minimizing risks
c) Maximizing shareholder wealth
d) Minimizing expenses
Correct Answer: c) Maximizing shareholder wealth
Rationale: The primary goal of financial management is to
maximize shareholder wealth, as it reflects the overall value of the
company and the efficiency of management in generating returns.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for an uncertain cash flow.
Correct Answer: Capital Asset Pricing Model (CAPM)
Rationale: The CAPM is utilized to ascertain the required return
on investment by accounting for the risk-free rate, the investment's
beta, and the market risk premium.
3. True/False: The Modigliani-Miller theorem states that, in the
absence of taxes, bankruptcy costs, and asymmetric information,
the value of a firm is unaffected by how that firm is financed.
Correct Answer: True
, Rationale: The theorem posits that under the specified
conditions, the firm's value is determined by its real assets and not
by the securities it issues.
4. Multiple Response: Which of the following are considered
derivative instruments?
a) Options
b) Bonds
c) Futures contracts
d) Stocks
Correct Answers: a) Options, c) Futures contracts
Rationale: Derivative instruments derive their value from the
performance of underlying assets. Options and futures are classic
examples of derivatives, whereas stocks and bonds are direct
securities.
5. Multiple Choice: In the context of capital budgeting, what does
the term 'sunk cost' refer to?
a) Costs that have already been incurred and cannot be recovered
b) The cost of new capital
c) The opportunity cost of an investment
d) The cost associated with project delays
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