RSM333
Introduction to Corporate Finance
University of Toronto · Rotman Commerce
─────────────────────────────────
COMPLETE EXAM Q&A BUNDLE
Midterm + Final Exam Preparation
50 Exam-Style Questions · Verified Answers · Full Rationales
· Graded A+
Topics Covered:
Time Value of Money · CAPM & Risk · WACC · Capital Structure · M&M Propositions
Dividend Policy · DCF Valuation · Multiples · M&A · Working Capital · EMH
How to Use This Document
This bundle contains 50 exam-style questions covering all major RSM333 topics tested in midterm and final
exams at Rotman Commerce, University of Toronto. Each question includes a verified answer and a
detailed rationale explaining the underlying concept.
• Attempt each question before reading the answer
• Focus on rationales — RSM333 exams test conceptual understanding, not just calculations
• Questions are modelled on Rotman's Examplify format used in actual RSM333 exams
UNIT 1: Time Value of Money & Capital Budgeting Foundations
Q1. A project requires an initial investment of $500,000 and generates cash flows of $150,000 per
year for 5 years. The discount rate is 10%. What is the NPV?
✔ Answer: NPV = $150,000 × PVIFA(10%, 5) – $500,000 = $150,000 × 3.7908 – $500,000 = $568,620
– $500,000 = $68,620 (Accept the project).
💡 Rationale: NPV > 0 means the project creates shareholder value equal to $68,620 above the required return. The
PVIFA annuity factor at 10% for 5 years is 3.7908.
, Q2. What is the decision rule when comparing NPV and IRR for independent projects?
✔ Answer: Accept if NPV > 0 OR if IRR > cost of capital (hurdle rate). Both methods give the same accept/
reject decision for independent projects.
💡 Rationale: NPV and IRR conflict only for mutually exclusive projects or when cash flow signs change more than
once (non-normal cash flows). For independent projects, they agree.
Q3. A project has the following cash flows: Year 0: –$200,000; Year 1: $80,000; Year 2: $100,000;
Year 3: $90,000. Calculate the Payback Period.
✔ Answer: Year 1 cumulative: –$120,000; Year 2 cumulative: –$20,000; Year 3 partial: $20,000/$90,000 = 0.
22 years. Payback = 2.22 years.
💡 Rationale: Payback counts the years until cumulative cash flows recover the initial investment. It ignores time
value of money and cash flows beyond payback — a key weakness.
Q4. What is the Profitability Index (PI) and when is it most useful?
✔ Answer: PI = (NPV + Initial Investment) / Initial Investment = PV of future cash flows / Initial Investment.
Most useful when capital is rationed — rank projects by PI to maximize value per dollar invested.
💡 Rationale: When firms have limited capital, NPV alone can mislead (a large NPV project may use all capital). PI
normalizes NPV per dollar, allowing optimal project selection under constraints.
Q5. Define the incremental cash flow principle in capital budgeting.
✔ Answer: Only cash flows that change as a direct result of accepting the project should be included.
Exclude sunk costs; include opportunity costs and externalities (cannibalization).
💡 Rationale: Sunk costs are irrelevant because they cannot be recovered. Opportunity costs represent the value of
the best forgone alternative — e.g., using owned land for a project means forgoing its sale or lease value.
UNIT 2: Risk, Return & CAPM
Q6. Stock A has a beta of 1.4. The risk-free rate is 3% and the market risk premium is 6%. What is
the required return using CAPM?
✔ Answer: Re = Rf + β(Rm – Rf) = 3% + 1.4 × 6% = 3% + 8.4% = 11.4%.
💡 Rationale: CAPM prices systematic (non-diversifiable) risk only. Beta measures sensitivity to market movements. A
beta >1 means the stock amplifies market movements.
Q7. What is the difference between systematic and unsystematic risk?
✔ Answer: Systematic risk (market risk) affects all firms and cannot be diversified away (e.g., recessions,
interest rate changes). Unsystematic risk (firm-specific) can be eliminated through diversification.
💡 Rationale: Investors are only compensated for bearing systematic risk because unsystematic risk can be diversified
away at no cost. This is the core logic behind CAPM.
Introduction to Corporate Finance
University of Toronto · Rotman Commerce
─────────────────────────────────
COMPLETE EXAM Q&A BUNDLE
Midterm + Final Exam Preparation
50 Exam-Style Questions · Verified Answers · Full Rationales
· Graded A+
Topics Covered:
Time Value of Money · CAPM & Risk · WACC · Capital Structure · M&M Propositions
Dividend Policy · DCF Valuation · Multiples · M&A · Working Capital · EMH
How to Use This Document
This bundle contains 50 exam-style questions covering all major RSM333 topics tested in midterm and final
exams at Rotman Commerce, University of Toronto. Each question includes a verified answer and a
detailed rationale explaining the underlying concept.
• Attempt each question before reading the answer
• Focus on rationales — RSM333 exams test conceptual understanding, not just calculations
• Questions are modelled on Rotman's Examplify format used in actual RSM333 exams
UNIT 1: Time Value of Money & Capital Budgeting Foundations
Q1. A project requires an initial investment of $500,000 and generates cash flows of $150,000 per
year for 5 years. The discount rate is 10%. What is the NPV?
✔ Answer: NPV = $150,000 × PVIFA(10%, 5) – $500,000 = $150,000 × 3.7908 – $500,000 = $568,620
– $500,000 = $68,620 (Accept the project).
💡 Rationale: NPV > 0 means the project creates shareholder value equal to $68,620 above the required return. The
PVIFA annuity factor at 10% for 5 years is 3.7908.
, Q2. What is the decision rule when comparing NPV and IRR for independent projects?
✔ Answer: Accept if NPV > 0 OR if IRR > cost of capital (hurdle rate). Both methods give the same accept/
reject decision for independent projects.
💡 Rationale: NPV and IRR conflict only for mutually exclusive projects or when cash flow signs change more than
once (non-normal cash flows). For independent projects, they agree.
Q3. A project has the following cash flows: Year 0: –$200,000; Year 1: $80,000; Year 2: $100,000;
Year 3: $90,000. Calculate the Payback Period.
✔ Answer: Year 1 cumulative: –$120,000; Year 2 cumulative: –$20,000; Year 3 partial: $20,000/$90,000 = 0.
22 years. Payback = 2.22 years.
💡 Rationale: Payback counts the years until cumulative cash flows recover the initial investment. It ignores time
value of money and cash flows beyond payback — a key weakness.
Q4. What is the Profitability Index (PI) and when is it most useful?
✔ Answer: PI = (NPV + Initial Investment) / Initial Investment = PV of future cash flows / Initial Investment.
Most useful when capital is rationed — rank projects by PI to maximize value per dollar invested.
💡 Rationale: When firms have limited capital, NPV alone can mislead (a large NPV project may use all capital). PI
normalizes NPV per dollar, allowing optimal project selection under constraints.
Q5. Define the incremental cash flow principle in capital budgeting.
✔ Answer: Only cash flows that change as a direct result of accepting the project should be included.
Exclude sunk costs; include opportunity costs and externalities (cannibalization).
💡 Rationale: Sunk costs are irrelevant because they cannot be recovered. Opportunity costs represent the value of
the best forgone alternative — e.g., using owned land for a project means forgoing its sale or lease value.
UNIT 2: Risk, Return & CAPM
Q6. Stock A has a beta of 1.4. The risk-free rate is 3% and the market risk premium is 6%. What is
the required return using CAPM?
✔ Answer: Re = Rf + β(Rm – Rf) = 3% + 1.4 × 6% = 3% + 8.4% = 11.4%.
💡 Rationale: CAPM prices systematic (non-diversifiable) risk only. Beta measures sensitivity to market movements. A
beta >1 means the stock amplifies market movements.
Q7. What is the difference between systematic and unsystematic risk?
✔ Answer: Systematic risk (market risk) affects all firms and cannot be diversified away (e.g., recessions,
interest rate changes). Unsystematic risk (firm-specific) can be eliminated through diversification.
💡 Rationale: Investors are only compensated for bearing systematic risk because unsystematic risk can be diversified
away at no cost. This is the core logic behind CAPM.
