Finance Quiz: Ultimate Exam Questions!

59 Questions | By Tyaroch | Updated: Mar 21, 2022 | Attempts: 416

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Finance Quiz: Ultimate Exam Questions! - Quiz

Finance quiz: ultimate exam questions! True and false quizzes give someone time to think deeply about a question. There are different ways that one can choose which investments to put their money in and one of them is using the net present value method in which one choose a project with the highest NPV. This quiz tests your in-depth knowledge on finance. Give it a try and see what to read more on!

Questions and Answers

1.

The company cost of capital is the appropriate discount rate for a firm's ______
- A.
  
  Value
- B.
  
  Average-risk projects
- C.
  
  High-risk projects
- D.
  
  Estimated-risk projects
2.

The appropriate hurdle rate for capital budgeting decisions is ______
- A.
  
  Degree of operating leverage
- B.
  
  Real Options
- C.
  
  Relative rate
- D.
  
  The opportunity cost of capital
3.

Each project should be evaluated at its own opportunity cost of capital. The true cost of capital depends on the use to which the capital is put.
- A.
  
  True
- B.
  
  False
4.

The company's cost of capital is the cost of debt of the firm.
- A.
  
  True
- B.
  
  False
5.

It is generally more accurate to estimate an "industry beta" for a portfolio of companies in the same industry than to estimate beta for a single company in that industry.
- A.
  
  True
- B.
  
  False
6.

The company cost of capital is defined as the expected return on a portfolio of all the company's existing securities.
- A.
  
  True
- B.
  
  False
7.

The company cost of capital is not the correct discount rate if the new projects are more or less risky than the firm's existing business.
- A.
  
  True
- B.
  
  False
8.

The cost of capital is estimated as a blend of the cost of debt (the interest rate) and the cost of equity (the expected rate of return demanded by investors in the firm's common stock).
- A.
  
  True
- B.
  
  False
9.

The blended measure of the company cost of capital is called the weighted-average cost of capital or WAACC.
- A.
  
  True
- B.
  
  False
10.

The noise in returns can obscure the true beta.
- A.
  
  True
- B.
  
  False
11.

Cash Flow = revenue - fixed costs - variable costs.
- A.
  
  True
- B.
  
  False
12.

PV(asset) = PV(revenue) - PV(fixed costs) - PV(variable costs)
- A.
  
  True
- B.
  
  False
13.

Empirical tests confirm that companies with high operating leverage actually do have high betas.
- A.
  
  True
- B.
  
  False
14.

Fudge factors in discount rates are dangerous because they displace clear thinking about future cash flows.
- A.
  
  True
- B.
  
  False
15.

Portfolio betas are more precise than individual asset betas.
- A.
  
  True
- B.
  
  False
16.

You should compare your company to an industry portfolio rather than a competitor.
- A.
  
  True
- B.
  
  False
17.

Only non-diversifiable risks affect the cost of capital.
- A.
  
  True
- B.
  
  False
18.

Cyclicality: Firms that vary positively with the business cycle tend to have higher betas.
- A.
  
  True
- B.
  
  False
19.

Projects with higher operating leverage (higher ratio of fixed costs to project value) tend to have higher betas.
- A.
  
  True
- B.
  
  False
20.

A diversifiable risk has no effect on the risk of a well-diversified portfolio and therefore no effect on the project’s beta. If a risk is diversifiable it does not change the cost of capital for the project. However, any possibility of bad outcomes does need to be factored in when calculating expected cash flows.
- A.
  
  True
- B.
  
  False
21.

The company cost of capital is the correct discount rate for all projects because the high risks of some projects are offset by the low risk of other projects.
- A.
  
  True
- B.
  
  False
22.

Distant cash flows are riskier than near term cash flows. Therefore long term projects require higher risk-adjusted discount rates.
- A.
  
  True
- B.
  
  False
23.

Adding fudge factors to discount rates undervalues long-lived projects compared with quick payoff projects.
- A.
  
  True
- B.
  
  False
24.

NPV should represent your best guess, so do not add fudge factors to cash flows or the cost of capital.
- A.
  
  True
- B.
  
  False
25.

Although scenarios allow you to strategically think about how you might structure operations and adapt to changing circumstances, they cannot depict the true range of possible outcomes.
- A.
  
  True
- B.
  
  False