Corporate Finance & Investment Flashcards

A firm's weighted average cost of capital (WACC) is best described as:

Answer: The minimum return a firm must earn to satisfy all capital providers

WACC represents the blended required return across all capital sources, weighted by their proportions in the capital structure.

Under the Modigliani-Miller theorem with taxes, a firm's value increases as it takes on more debt because:

Answer: Interest payments shield income from corporate taxes

The tax shield on interest payments increases firm value by reducing the effective cost of debt financing.

Which capital budgeting technique explicitly accounts for the time value of money AND provides a dollar-amount measure of value created?

Answer: Net present value (NPV)

NPV discounts all cash flows at the required rate and shows the absolute dollar amount of value added above the investment cost.

A project has an IRR of 14% and the firm's WACC is 11%. Which statement is correct?

Answer: The project should be accepted because IRR exceeds WACC

When IRR exceeds the cost of capital (WACC), the project generates returns above the hurdle rate and should be accepted.

The Capital Asset Pricing Model (CAPM) states that the expected return on a security equals:

Answer: Risk-free rate + Beta × (Market return − Risk-free rate)

CAPM: E(R) = Rf + β(Rm − Rf), where the equity risk premium is scaled by beta to reflect systematic risk.

Which of the following is NOT a form of market efficiency?

Answer: Absolute-form efficiency

The Efficient Market Hypothesis recognizes only three forms: weak, semi-strong, and strong; 'absolute-form' is not a recognized category.

A company repurchases its own shares on the open market. What is the primary effect on earnings per share (EPS)?

Answer: EPS increases because fewer shares are outstanding

Share buybacks reduce the share count, so the same net income is spread over fewer shares, mechanically increasing EPS.