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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Time Value of Money | 18% | - Discounted cash flow valuation - Present value, future value, annuities, perpetuities - Effective vs nominal interest rates |
| Topic 2: Capital Structure and Financing | 10% | - Dividend policy and payout decisions - Leverage and cost of capital |
| Topic 3: Capital Budgeting | 10% | - Cash flow estimation and project evaluation - NPV, IRR, payback period, profitability index |
| Topic 4: Financial Markets and Corporate Objectives | 15% | - Goal of the firm: shareholder wealth maximization - Role of financial institutions - Types of financial markets and instruments |
| Topic 5: Risk and Return | 12% | - Portfolio risk and diversification - Beta and Capital Asset Pricing Model - Systematic vs unsystematic risk |
| Topic 6: Financial Statement Analysis | 20% | - Common-size and trend analysis - Income statement, balance sheet, cash flow statement - Ratio analysis: liquidity, profitability, solvency, efficiency |
| Topic 7: Valuation of Securities | 15% | - Bond valuation, yield to maturity, risk characteristics - Stock valuation: dividend growth model, CAPM - Cost of capital components |
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NEW QUESTION # 76
A company has just increased its dividend payout ratio.
What effect will this have on the company's sustainable growth rate?
Answer: B
Explanation:
The sustainable growth rate (SGR) represents the maximum rate at which a firm can grow its sales, assets, and earnings without raising new external equity. It is calculated as ROE × retention ratio, where the retention ratio equals one minus the dividend payout ratio. When a firm increases its dividend payout ratio, it retains less earnings for reinvestment, thereby reducing internally generated equity growth. Unless return on equity increases enough to offset this reduction-which is not assumed here-the sustainable growth rate will decline. Financial management theory emphasizes the trade-off between paying dividends and reinvesting earnings to support future growth. Option C correctly reflects this fundamental relationship between dividend policy and sustainable growth.
NEW QUESTION # 77
What is the purpose of the Sarbanes-Oxley Act requirement for the board of directors to effectively represent shareholders?
Answer: A
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 # 78
How does a competitive sale of bonds work?
Answer: A
Explanation:
In a competitive bond sale, the issuer invites multiple underwriters (often investment banks) to bid on underwriting the bond issue. Each underwriting group proposes terms-commonly including the interest cost to the issuer (true interest cost or net interest cost), pricing, and underwriting spread. The issuer then selects the bid that provides the most favorable overall financing terms, typically the lowest borrowing cost for the desired structure and risk profile. This process is designed to create market competition among underwriters, which can reduce underwriting costs and improve pricing efficiency-especially when the issuer is well-known and the bond issue is relatively standard. This differs from a negotiated sale (option A), where the issuer works directly with a chosen underwriter to set terms through discussion rather than competitive bidding. Option C describes how an issuer might choose firms to participate, but it is not the defining mechanism of a competitive sale. Option D is incorrect because governments do not set fixed rates for corporate bond underwriting; pricing is determined by market conditions, issuer credit risk, investor demand, and the competitive bidding process itself.
NEW QUESTION # 79
What is systematic risk in the capital asset pricing model (CAPM)?
Answer: D
Explanation:
Systematic risk is the portion of total risk that affects the entire market or a broad group of securities and cannot be eliminated through diversification. It arises from economy-wide factors such as changes in interest rates, inflation, recessions, geopolitical events, and overall market sentiment. In the Capital Asset Pricing Model, systematic risk is the only type of risk for which investors are compensated because unsystematic, or firm-specific, risk can be diversified away by holding a well-balanced portfolio. Choice D is correct because it defines systematic risk as market-wide risk that influences virtually all securities to some degree. Choice C refers to company-specific risk, which is unsystematic risk. Choice B is incorrect because poor diversification may leave an investor exposed to more firm-specific risk, but that does not define systematic risk itself.
Choice A is far too extreme and does not capture the finance definition. Financial management uses the CAPM framework to connect systematic risk to required return through beta, which measures a security's sensitivity to movements in the market portfolio. Therefore, D is the correct answer because systematic risk is broad market risk that cannot be removed through diversification.
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NEW QUESTION # 80
A company is expected to pay a dividend of $2 next year, and dividends are expected to grow at 5% per year indefinitely. The required rate of return on the company's stock is 10%.
What is the value of the stock using the Gordon growth model?
Answer: C
Explanation:
The Gordon growth model values a stock assuming dividends grow at a constant rate indefinitely. The formula is:
Stock Value = D# ÷ (r # g),
where D# is the expected dividend next year, r is the required rate of return, and g is the growth rate.
Substituting the values:
$2 ÷ (0.10 # 0.05) = $2 ÷ 0.05 = $40.
This model is widely used in valuation for mature companies with stable dividend growth. It highlights the sensitivity of stock value to growth expectations and required returns. Option C correctly applies the Gordon growth model formula.
NEW QUESTION # 81
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