Corporate Finance Final Exam Review: TVM, NPV, CAPM
Practice Q&A (2026/2027)
Foundational Corporate Finance Principles | Key Domains: Time Value of Money (TVM)
Calculations, Net Present Value (NPV) & Internal Rate of Return (IRR) Analysis, Capital Asset Pricing
Model (CAPM) & Cost of Equity, Capital Budgeting Techniques, and Risk & Return Fundamentals |
Expert-Aligned Structure | Final Exam Review Format
Introduction
This structured Corporate Finance Final Exam Review for 2026/2027 provides a focused set of
practice questions with correct answers and rationales on core financial principles. It emphasizes
the quantitative application of key models and decision rules used to evaluate investment
opportunities, assess risk, and make value-creating financial decisions for a corporation.
Review Structure:
● Core Concept Practice Bank: (60 PROBLEMS & QUESTIONS)
Answer Format
All correct numerical answers and financial decisions must appear in bold and cyan blue,
accompanied by concise rationales explaining the step-by-step calculation (e.g., using the NPV
formula, solving for IRR, applying CAPM), the financial rationale for accepting or rejecting a project
based on NPV>0, the interpretation of beta (β) in CAPM, and why alternative calculations or
decisions are mathematically or financially incorrect.
1. What is the future value of $1,000 invested today at 6% annual interest for 5 years?
● A. $1,276.28
● B. $1,338.23
● C. $1,060.00
● D. $1,500.00
B. $1,338.23
FV = PV × (1 + r)^n = 1000 × (1.06)^5 = 1000 × 1.3382255776 ≈ $1,338.23. This uses the compound
interest formula for a single lump sum.
2. A project requires an initial investment of $50,000 and generates cash flows of $15,000
per year for 5 years. If the discount rate is 10%, what is the NPV?
, ● A. $6,861.80
● B. -$5,000.00
● C. $0.00
● D. $12,500.00
A. $6,861.80
NPV = -50,000 + Σ [15,000 / (1.10)^t] for t=1 to 5. The PV of annuity = 15,000 × [1 - (1.10)^-5]/0.10 =
15,000 × 3.7908 = $56,862. Subtract initial outlay: 56,862 - 50,000 = $6,862 (rounded). Since NPV > 0,
the project adds value and should be accepted.
3. Using CAPM, what is the cost of equity if the risk-free rate is 3%, the market risk premium
is 6%, and beta (β) is 1.2?
● A. 9.0%
● B. 10.2%
● C. 7.2%
● D. 12.0%
B. 10.2%
CAPM: r_e = r_f + β × (r_m - r_f) = 3% + 1.2 × 6% = 3% + 7.2% = 10.2%. Beta measures systematic risk;
a β > 1 implies higher volatility than the market.
4. A perpetuity pays $100 annually. If the discount rate is 5%, what is its present value?
● A. $1,000
● B. $2,000
● C. $500
● D. $100
B. $2,000
PV of perpetuity = C / r = .05 = $2,000. This assumes constant payments forever with no growth.
5. If a project’s IRR is 12% and the required return is 10%, should the project be accepted?
● A. No, because IRR < required return
● B. Yes, because IRR > required return
● C. Only if NPV = 0
● D. Cannot decide without cash flows
B. Yes, because IRR > required return
, The IRR rule states: accept if IRR > required rate of return (hurdle rate). Here, 12% > 10%, so the
project earns more than the cost of capital and should be accepted. However, NPV is preferred for
mutually exclusive projects.
6. What is the present value of $5,000 received in 3 years at a 7% discount rate?
● A. $4,081.49
● B. $5,000.00
● C. $6,125.22
● D. $4,500.00
A. $4,081.49
PV = FV / (1 + r)^n = 5000 / (1.07)^3 = .225043 ≈ $4,081.49.
7. A stock has a beta of 0.8. The risk-free rate is 2%, and the expected market return is 9%.
What is the expected return on the stock?
● A. 7.6%
● B. 9.0%
● C. 8.0%
● D. 6.4%
A. 7.6%
r_e = r_f + β(r_m - r_f) = 2% + 0.8(9% - 2%) = 2% + 0.8×7% = 2% + 5.6% = 7.6%. Beta < 1 indicates
lower systematic risk than the market.
8. A project costs $100,000 and returns $30,000 per year for 4 years. What is the payback
period?
● A. 3.0 years
● B. 3.33 years
● C. 4.0 years
● D. 2.5 years
B. 3.33 years
Cumulative cash flow: Year 1: $30k, Year 2: $60k, Year 3: $90k, Year 4: $120k. Payback = 3 + (100,000 -
90,000)/30,000 = 3 + 10,000/30,000 = 3.33 years. Payback ignores time value of money and cash flows
beyond payback.
9. Which statement about NPV is TRUE?
● A. NPV ignores the time value of money
● B. A positive NPV means the project earns less than the cost of capital
Practice Q&A (2026/2027)
Foundational Corporate Finance Principles | Key Domains: Time Value of Money (TVM)
Calculations, Net Present Value (NPV) & Internal Rate of Return (IRR) Analysis, Capital Asset Pricing
Model (CAPM) & Cost of Equity, Capital Budgeting Techniques, and Risk & Return Fundamentals |
Expert-Aligned Structure | Final Exam Review Format
Introduction
This structured Corporate Finance Final Exam Review for 2026/2027 provides a focused set of
practice questions with correct answers and rationales on core financial principles. It emphasizes
the quantitative application of key models and decision rules used to evaluate investment
opportunities, assess risk, and make value-creating financial decisions for a corporation.
Review Structure:
● Core Concept Practice Bank: (60 PROBLEMS & QUESTIONS)
Answer Format
All correct numerical answers and financial decisions must appear in bold and cyan blue,
accompanied by concise rationales explaining the step-by-step calculation (e.g., using the NPV
formula, solving for IRR, applying CAPM), the financial rationale for accepting or rejecting a project
based on NPV>0, the interpretation of beta (β) in CAPM, and why alternative calculations or
decisions are mathematically or financially incorrect.
1. What is the future value of $1,000 invested today at 6% annual interest for 5 years?
● A. $1,276.28
● B. $1,338.23
● C. $1,060.00
● D. $1,500.00
B. $1,338.23
FV = PV × (1 + r)^n = 1000 × (1.06)^5 = 1000 × 1.3382255776 ≈ $1,338.23. This uses the compound
interest formula for a single lump sum.
2. A project requires an initial investment of $50,000 and generates cash flows of $15,000
per year for 5 years. If the discount rate is 10%, what is the NPV?
, ● A. $6,861.80
● B. -$5,000.00
● C. $0.00
● D. $12,500.00
A. $6,861.80
NPV = -50,000 + Σ [15,000 / (1.10)^t] for t=1 to 5. The PV of annuity = 15,000 × [1 - (1.10)^-5]/0.10 =
15,000 × 3.7908 = $56,862. Subtract initial outlay: 56,862 - 50,000 = $6,862 (rounded). Since NPV > 0,
the project adds value and should be accepted.
3. Using CAPM, what is the cost of equity if the risk-free rate is 3%, the market risk premium
is 6%, and beta (β) is 1.2?
● A. 9.0%
● B. 10.2%
● C. 7.2%
● D. 12.0%
B. 10.2%
CAPM: r_e = r_f + β × (r_m - r_f) = 3% + 1.2 × 6% = 3% + 7.2% = 10.2%. Beta measures systematic risk;
a β > 1 implies higher volatility than the market.
4. A perpetuity pays $100 annually. If the discount rate is 5%, what is its present value?
● A. $1,000
● B. $2,000
● C. $500
● D. $100
B. $2,000
PV of perpetuity = C / r = .05 = $2,000. This assumes constant payments forever with no growth.
5. If a project’s IRR is 12% and the required return is 10%, should the project be accepted?
● A. No, because IRR < required return
● B. Yes, because IRR > required return
● C. Only if NPV = 0
● D. Cannot decide without cash flows
B. Yes, because IRR > required return
, The IRR rule states: accept if IRR > required rate of return (hurdle rate). Here, 12% > 10%, so the
project earns more than the cost of capital and should be accepted. However, NPV is preferred for
mutually exclusive projects.
6. What is the present value of $5,000 received in 3 years at a 7% discount rate?
● A. $4,081.49
● B. $5,000.00
● C. $6,125.22
● D. $4,500.00
A. $4,081.49
PV = FV / (1 + r)^n = 5000 / (1.07)^3 = .225043 ≈ $4,081.49.
7. A stock has a beta of 0.8. The risk-free rate is 2%, and the expected market return is 9%.
What is the expected return on the stock?
● A. 7.6%
● B. 9.0%
● C. 8.0%
● D. 6.4%
A. 7.6%
r_e = r_f + β(r_m - r_f) = 2% + 0.8(9% - 2%) = 2% + 0.8×7% = 2% + 5.6% = 7.6%. Beta < 1 indicates
lower systematic risk than the market.
8. A project costs $100,000 and returns $30,000 per year for 4 years. What is the payback
period?
● A. 3.0 years
● B. 3.33 years
● C. 4.0 years
● D. 2.5 years
B. 3.33 years
Cumulative cash flow: Year 1: $30k, Year 2: $60k, Year 3: $90k, Year 4: $120k. Payback = 3 + (100,000 -
90,000)/30,000 = 3 + 10,000/30,000 = 3.33 years. Payback ignores time value of money and cash flows
beyond payback.
9. Which statement about NPV is TRUE?
● A. NPV ignores the time value of money
● B. A positive NPV means the project earns less than the cost of capital
