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IIA CIA Exam
Certified Internal Auditor Exam (Page 19 )

Updated On: 12-Jan-2026
Page 19 of 342
PDF with 1702 Questions

The funds-needed line does not pass through the origin unless the entity has a

  1. One-hundred percent dividend payout policy_
  2. Zero percent dividend payout policy_
  3. One-hundred percent sales growth rate.
  4. Zero percent sales growth rate.

Answer(s): A

Explanation:

If all earnings are paid out as dividends, then there is no earnings retention. All sales growth must be financed from spontaneous or external sources



The efficient markets theory implies that securities prices are

  1. Not a good estimate of future cash flows.
  2. Fair and a reflection of all publicly available information.
  3. Not the best benchmark for corporate financial decisions
  4. Always less than their fair value.

Answer(s): B

Explanation:

The efficient markets theory proposes that the market is continuously adjusting to new information and acting to correct pricing errors.



When comparing two companies, if all else is equal, the entity that has a higher dividend payout ratio will have a

  1. Higher marginal cost of capital.
  2. Lower debt ratio.
  3. Higher investment opportunity schedule.
  4. Higher price to earnings ratio.

Answer(s): A

Explanation:

The higher the dividend payout ratio, the sooner retained earnings are exhausted and the entity must seek more costly, outside equity financing. This drives the marginal cost of capital.



If a high percentage of an entity's total costs is fixed, the entity's operating leverage will be

  1. High.
  2. Low.
  3. Unchanged.
  4. Unable to be determined

Answer(s): A

Explanation:

In business terminology, a high degree of operating leverage, other things held constant, means that a relatively small change in sales will result in a large change in operating income. Therefore, if a high percentage of an entity's total cost is fixed, the entity is said to have a high degree of operating leverage.



Capital structure decisions involve determining the proportions of financing from

  1. Short-term or long-term debt
  2. Debt or equity.
  3. Short-term or long-term assets.
  4. Retained earnings or ordinary stock.

Answer(s): B

Explanation:

The optimal capital structure minimizes the weighted average cost of capital and thereby maximizes the value of the entity's stock. Both debt and equity are factors in an entity's capital structure.



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