PRINCIPLES OF MANAGERIAL FINANCE EXAM with
Questions and Answers/Plus a Rationale Updated 2026
A+/Instant Download PDF
EXAM COVERAGE
1. Time Value of Money and Financial Valuation
2. Risk, Return, and Capital Asset Pricing Model (CAPM)
3. Capital Budgeting, Cash Flow Estimation, and Risk Analysis
4. Cost of Capital, Capital Structure, and Leverage
5. Working Capital Management and Dividend Policy
1. A corporate finance manager is evaluating a capital project that requires an initial cash outlay of
$1,500,000 and is expected to generate cash inflows of $400,000 annually for 5 years. Assuming
the firm's cost of capital is 9 percent, what is the net present value (NPV) of the project, and
should it be accepted?
A. -$254,320; Reject because NPV is negative.
B. $55,425; Accept because NPV is positive.
C. $125,890; Accept because the payback period is under 3 years.
D. $500,000; Accept because cumulative inflows exceed the outlay.
Answer: B
Rationale: The net present value is calculated by discounting the 5-year annuity of $400,000 at 9
percent ($1,555,425 present value) and subtracting the initial outlay of $1,500,000, yielding a
positive NPV of $55,425. A positive NPV indicates that the project adds value to the firm and
should be accepted. Options A, C, and D are mathematically incorrect or rely on flawed decision
metrics.
,2. A bond with a $1,000 par value, an 8 percent annual coupon, and 10 years to maturity is
currently trading in the market to yield 10 percent annually. What is the current value of this
bond?
A. $1,000.00
B. $877.11
C. $1,134.20
D. $800.00
Answer: B
Rationale: Because the required return (10%) exceeds the coupon rate (8%), the bond trades at
a discount. Discounting the 10-year annuity of $80 coupon payments and the $1,000 par value at
10 percent yields a present value of $877.11. Options A, C, and D miscalculate pricing
mechanics under discount conditions.
3. An investor is considering two independent stocks. Stock X has an expected return of 14 percent
and a standard deviation of 20 percent. Stock Y has an expected return of 18 percent and a
standard deviation of 30 percent. Which stock offers a more favorable risk-return trade-off
measured by the coefficient of variation (CV)?
A. Stock Y, because its higher expected return compensates for higher total risk.
B. Stock X, because it exhibits lower risk per unit of expected return.
C. Both stocks offer identical risk-return efficiency since their Sharpe ratios are equal.
D. Neither stock is viable because the coefficient of variation exceeds 1.0.
Answer: B
Rationale: The coefficient of variation is calculated as standard deviation divided by expected
return (CV = Risk / Return). For Stock X, CV is 20/14 = 1.43, while for Stock Y, CV is 30/18 =
1.67. A lower coefficient of variation indicates less risk per unit of return, making Stock X more
favorable.
4. A firm's capital structure consists of 40 percent debt, 10 percent preferred stock, and 50 percent
common equity. The before-tax cost of debt is 7 percent, the cost of preferred stock is 9 percent,
and the cost of common equity is 13 percent. If the corporate tax rate is 25 percent, what is the
firm's weighted average cost of capital (WACC)?
A. 10.00 percent
, B. 8.825 percent
C. 9.650 percent
D. 11.250 percent
Answer: B
Rationale: WACC is calculated as the weighted sum of after-tax component costs: (0.40 * 7% *
(1 - 0.25)) + (0.10 * 9%) + (0.50 * 13%). This yields (0.40 * 5.25%) + 0.90% + 6.50% = 2.10%
+ 0.90% + 6.50% = 8.825 percent. Options A, C, and D misapply tax adjustments or component
weights.
5. According to the Capital Asset Pricing Model (CAPM), if the risk-free rate is 4 percent, the
market risk premium is 6 percent, and a stock has a beta of 1.25, what is the required rate of
return for this equity security?
A. 10.00 percent
B. 11.00 percent
C. 11.50 percent
D. 13.25 percent
Answer: C
Rationale: CAPM formula is Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-
Free Rate). Substituting the values: 4% + 1.25 * (6%) = 4% + 7.50% = 11.50 percent. Options
A, B, and D reflect arithmetic errors in applying beta to the market risk premium.
6. A corporation has fixed operating costs of $500,000, a selling price of $50 per unit, and variable
operating costs of $30 per unit. What is the firm's operating breakeven point in units?
A. 10,000 units
B. 25,000 units
C. 16,667 units
D. 50,000 units
Answer: B
, Rationale: The operating breakeven point in units is calculated by dividing fixed operating costs
by the contribution margin per unit ($50 - $30 = $20). Thus, $500,000 / $20 = 25,000 units.
Options A, C, and D fail to utilize the correct contribution margin formula.
7. A financial analyst is reviewing a project with non-normal cash flows (i.e., cash outflows occur
at both the beginning and end of the project life). Which capital budgeting evaluation metric is
most misleading under these circumstances?
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Modified Internal Rate of Return (MIRR)
D. Discounted Payback Period
Answer: B
Rationale: Non-normal cash flows create multiple internal rates of return (multiple sign changes
in cash flow streams), rendering the standard IRR metric mathematically ambiguous and
unreliable. NPV and MIRR correctly handle non-normal cash flows.
8. A firm maintains an inventory conversion period of 45 days, a receivables collection period of 35
days, and a payables deferral period of 30 days. What is the firm's cash conversion cycle (CCC)?
A. 30 days
B. 40 days
C. 50 days
D. 110 days
Answer: C
Rationale: The cash conversion cycle is calculated as Inventory Conversion Period +
Receivables Collection Period - Payables Deferral Period. Thus, 45 + 35 - 30 = 50 days.
Options A, B, and D miscalculate the operating cycle timing mechanics.
9. When evaluating lease financing versus purchasing a fixed asset, which factor favors leasing
over borrowing and buying?
A. The firm has abundant tax-loss carryforwards and high taxable income.
B. The asset is subject to rapid technological obsolescence, shifting residual value risk to
the lessor.
Questions and Answers/Plus a Rationale Updated 2026
A+/Instant Download PDF
EXAM COVERAGE
1. Time Value of Money and Financial Valuation
2. Risk, Return, and Capital Asset Pricing Model (CAPM)
3. Capital Budgeting, Cash Flow Estimation, and Risk Analysis
4. Cost of Capital, Capital Structure, and Leverage
5. Working Capital Management and Dividend Policy
1. A corporate finance manager is evaluating a capital project that requires an initial cash outlay of
$1,500,000 and is expected to generate cash inflows of $400,000 annually for 5 years. Assuming
the firm's cost of capital is 9 percent, what is the net present value (NPV) of the project, and
should it be accepted?
A. -$254,320; Reject because NPV is negative.
B. $55,425; Accept because NPV is positive.
C. $125,890; Accept because the payback period is under 3 years.
D. $500,000; Accept because cumulative inflows exceed the outlay.
Answer: B
Rationale: The net present value is calculated by discounting the 5-year annuity of $400,000 at 9
percent ($1,555,425 present value) and subtracting the initial outlay of $1,500,000, yielding a
positive NPV of $55,425. A positive NPV indicates that the project adds value to the firm and
should be accepted. Options A, C, and D are mathematically incorrect or rely on flawed decision
metrics.
,2. A bond with a $1,000 par value, an 8 percent annual coupon, and 10 years to maturity is
currently trading in the market to yield 10 percent annually. What is the current value of this
bond?
A. $1,000.00
B. $877.11
C. $1,134.20
D. $800.00
Answer: B
Rationale: Because the required return (10%) exceeds the coupon rate (8%), the bond trades at
a discount. Discounting the 10-year annuity of $80 coupon payments and the $1,000 par value at
10 percent yields a present value of $877.11. Options A, C, and D miscalculate pricing
mechanics under discount conditions.
3. An investor is considering two independent stocks. Stock X has an expected return of 14 percent
and a standard deviation of 20 percent. Stock Y has an expected return of 18 percent and a
standard deviation of 30 percent. Which stock offers a more favorable risk-return trade-off
measured by the coefficient of variation (CV)?
A. Stock Y, because its higher expected return compensates for higher total risk.
B. Stock X, because it exhibits lower risk per unit of expected return.
C. Both stocks offer identical risk-return efficiency since their Sharpe ratios are equal.
D. Neither stock is viable because the coefficient of variation exceeds 1.0.
Answer: B
Rationale: The coefficient of variation is calculated as standard deviation divided by expected
return (CV = Risk / Return). For Stock X, CV is 20/14 = 1.43, while for Stock Y, CV is 30/18 =
1.67. A lower coefficient of variation indicates less risk per unit of return, making Stock X more
favorable.
4. A firm's capital structure consists of 40 percent debt, 10 percent preferred stock, and 50 percent
common equity. The before-tax cost of debt is 7 percent, the cost of preferred stock is 9 percent,
and the cost of common equity is 13 percent. If the corporate tax rate is 25 percent, what is the
firm's weighted average cost of capital (WACC)?
A. 10.00 percent
, B. 8.825 percent
C. 9.650 percent
D. 11.250 percent
Answer: B
Rationale: WACC is calculated as the weighted sum of after-tax component costs: (0.40 * 7% *
(1 - 0.25)) + (0.10 * 9%) + (0.50 * 13%). This yields (0.40 * 5.25%) + 0.90% + 6.50% = 2.10%
+ 0.90% + 6.50% = 8.825 percent. Options A, C, and D misapply tax adjustments or component
weights.
5. According to the Capital Asset Pricing Model (CAPM), if the risk-free rate is 4 percent, the
market risk premium is 6 percent, and a stock has a beta of 1.25, what is the required rate of
return for this equity security?
A. 10.00 percent
B. 11.00 percent
C. 11.50 percent
D. 13.25 percent
Answer: C
Rationale: CAPM formula is Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-
Free Rate). Substituting the values: 4% + 1.25 * (6%) = 4% + 7.50% = 11.50 percent. Options
A, B, and D reflect arithmetic errors in applying beta to the market risk premium.
6. A corporation has fixed operating costs of $500,000, a selling price of $50 per unit, and variable
operating costs of $30 per unit. What is the firm's operating breakeven point in units?
A. 10,000 units
B. 25,000 units
C. 16,667 units
D. 50,000 units
Answer: B
, Rationale: The operating breakeven point in units is calculated by dividing fixed operating costs
by the contribution margin per unit ($50 - $30 = $20). Thus, $500,000 / $20 = 25,000 units.
Options A, C, and D fail to utilize the correct contribution margin formula.
7. A financial analyst is reviewing a project with non-normal cash flows (i.e., cash outflows occur
at both the beginning and end of the project life). Which capital budgeting evaluation metric is
most misleading under these circumstances?
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Modified Internal Rate of Return (MIRR)
D. Discounted Payback Period
Answer: B
Rationale: Non-normal cash flows create multiple internal rates of return (multiple sign changes
in cash flow streams), rendering the standard IRR metric mathematically ambiguous and
unreliable. NPV and MIRR correctly handle non-normal cash flows.
8. A firm maintains an inventory conversion period of 45 days, a receivables collection period of 35
days, and a payables deferral period of 30 days. What is the firm's cash conversion cycle (CCC)?
A. 30 days
B. 40 days
C. 50 days
D. 110 days
Answer: C
Rationale: The cash conversion cycle is calculated as Inventory Conversion Period +
Receivables Collection Period - Payables Deferral Period. Thus, 45 + 35 - 30 = 50 days.
Options A, B, and D miscalculate the operating cycle timing mechanics.
9. When evaluating lease financing versus purchasing a fixed asset, which factor favors leasing
over borrowing and buying?
A. The firm has abundant tax-loss carryforwards and high taxable income.
B. The asset is subject to rapid technological obsolescence, shifting residual value risk to
the lessor.
