Practice Test Geeks(CA) Chartered Certified Accountant Practice Test
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Corporate Finance & Investment Flashcards

7 cards from real CA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Corporate Finance & Investment flashcards as text

  1. An investor uses the profitability index (PI) to rank mutually exclusive projects with different scales. The PI is calculated as:

    Answer: PV of inflows divided by PV of outflows

    PI = PV of future cash inflows ÷ PV of initial outflows; a PI above 1.0 indicates value creation, and it is useful for capital rationing.

  2. Under the pecking order theory of capital structure, firms prefer to finance investments in which order?

    Answer: Retained earnings first, then debt, then new equity

    Pecking order theory holds that firms prefer internal funds (retained earnings) due to no information asymmetry costs, then debt, and issue new equity only as a last resort.

  3. A portfolio manager calculates that a portfolio's beta is 1.4. In a market that falls 10%, the portfolio is expected to fall approximately:

    Answer: 14%

    Expected portfolio return = Beta × Market return = 1.4 × (−10%) = −14%; a beta above 1 amplifies market movements.

  4. In discounted cash flow (DCF) valuation, the terminal value typically accounts for:

    Answer: The bulk of total enterprise value from cash flows beyond the explicit forecast period

    Terminal value captures the value of all cash flows beyond the explicit forecast horizon and often represents the majority of total DCF value.

  5. Which type of merger combines two companies at different stages of the same supply chain?

    Answer: Vertical merger

    A vertical merger integrates a firm with a supplier or distributor along the same value chain, unlike horizontal (same industry level) or conglomerate (unrelated industries).

  6. The Hamada equation is used to:

    Answer: Adjust a firm's beta for the effects of financial leverage

    The Hamada equation unlever and re-levers beta to isolate business risk from financial risk when comparing firms with different capital structures.

  7. A rights issue allows existing shareholders to:

    Answer: Purchase newly issued shares at a discount before the public offering

    A rights issue gives existing shareholders the pre-emptive right to subscribe for new shares at a below-market price, maintaining their proportional ownership.