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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Time Value of Money | 18% | - Discounted cash flow valuation - Effective vs nominal interest rates - Present value, future value, annuities, perpetuities |
| Topic 2: Capital Structure and Financing | 10% | - Leverage and cost of capital - Dividend policy and payout decisions |
| Topic 3: Financial Markets and Corporate Objectives | 15% | - Types of financial markets and instruments - Role of financial institutions - Goal of the firm: shareholder wealth maximization |
| Topic 4: Risk and Return | 12% | - Beta and Capital Asset Pricing Model - Systematic vs unsystematic risk - Portfolio risk and diversification |
| Topic 5: Financial Statement Analysis | 20% | - Income statement, balance sheet, cash flow statement - Common-size and trend analysis - Ratio analysis: liquidity, profitability, solvency, efficiency |
| Topic 6: Capital Budgeting | 10% | - NPV, IRR, payback period, profitability index - Cash flow estimation and project evaluation |
| Topic 7: Valuation of Securities | 15% | - Bond valuation, yield to maturity, risk characteristics - Cost of capital components - Stock valuation: dividend growth model, CAPM |
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NEW QUESTION # 21
What is a drawback of using the Gordon growth model for estimating the cost of common equity?
Answer: C
Explanation:
The Gordon growth model estimates the cost of common equity based on dividends, assuming dividends grow at a constant rate indefinitely. While the model is simple and intuitive, its main drawback is that it can only be applied to firms that pay dividends and have stable, predictable growth rates. Many firms-especially young, high-growth, or technology companies-either do not pay dividends or experience volatile growth, making the model inappropriate for them. Additionally, small changes in the growth rate assumption can lead to large changes in estimated equity cost, increasing sensitivity and potential estimation error. Financial management texts emphasize that while the Gordon growth model is useful for mature, dividend-paying firms, it lacks flexibility across industries and life-cycle stages. Option D correctly identifies this key limitation.
NEW QUESTION # 22
What is an advantage of using the Gordon growth model to estimate the cost of common equity?
Answer: B
Explanation:
A major advantage of the Gordon growth model is that it explicitly incorporates expectations about future dividend growth. By linking the stock's value to anticipated dividends and their growth rate, the model aligns valuation with investors' forward-looking expectations rather than solely historical data.
This forward-looking nature is consistent with modern financial management principles, which emphasize expected future cash flows as the primary driver of value. Unlike CAPM, which focuses on risk via beta, the Gordon growth model directly reflects dividend policy and growth prospects. For mature firms with stable growth, this provides a practical and intuitive estimate of the cost of equity.
Option C correctly identifies this strength of the model.
NEW QUESTION # 23
Why might investors choose to invest in junk bonds?
Answer: A
Explanation:
Junk bonds, also known as high-yield bonds, are issued by firms with lower credit ratings and therefore higher default risk. To compensate investors for this additional risk, these bonds offer higher interest rates than investment-grade bonds. From a financial management and portfolio perspective, investors may include junk bonds to enhance portfolio returns, particularly when they believe default risk is overstated or when economic conditions are favorable. Junk bonds do not guarantee returns and are not backed by government guarantees, making options A and D incorrect. They also do not consistently outperform equities, especially during periods of financial stress. Option B accurately reflects the risk- return tradeoff that underpins investment decisions in capital market theory: higher expected returns are associated with higher risk.
NEW QUESTION # 24
What is the difference between market orders and limit orders?
Answer: A
Explanation:
A market order instructs a broker to buy or sell a security immediately at the best available current market price. The main priority of a market order is speed of execution, not price certainty. In contrast, a limit order specifies the exact price at which an investor is willing to buy or sell. A buy limit order will only execute at the limit price or lower, while a sell limit order will only execute at the limit price or higher. The advantage of a limit order is price control, but the tradeoff is that the order may not be filled if the market never reaches the specified price. This distinction is important in capital markets because it affects trading strategy, transaction cost, and execution risk. Choice A reverses the real logic. Choice B is incorrect because both market and limit orders can be used for either buying or selling. Choice D is also incorrect because market orders do not execute at a fixed price; they execute at whatever the best available market price is at that moment. Therefore, C correctly states the fundamental difference between market orders and limit orders.
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NEW QUESTION # 25
What is the purpose of the Sarbanes-Oxley Act requirement for the board of directors to effectively represent shareholders?
Answer: B
Explanation:
The Sarbanes-Oxley Act reinforces the board of directors' fiduciary duty to act in the best interests of shareholders. This includes providing independent oversight of management, ensuring financial reporting integrity, and protecting shareholder rights. SOX emphasizes board independence, particularly through audit committees composed of independent directors. Financial management theory recognizes the board as a key mechanism for reducing agency conflicts between management and shareholders. Option D correctly reflects this governance-focused objective.
NEW QUESTION # 26
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