FUNDAMENTALS OF CORPORATE
FINANCE - COMPREHENSIVE
ASSESSMENT QUESTIONS AND
CORRECT ANSWERS LATEST UPDATE
THIS YEAR
1. Which of the following business organizational forms subjects the owners to double
taxation?
A. Sole proprietorship
B. Partnership
C. Limited liability partnership
D. Corporation
Answer: D
Conceptual Explanation: In a corporation, profits are taxed at the corporate level and
then again at the personal level when distributed as dividends.
2. When analyzing a balance sheet, which of the following represents the theoretical amount
that would remain for shareholders if all assets were sold and all liabilities paid at book
value?
A. Book Value of Equity
,B. Net Working Capital
C. Total Assets
D. Market Capitalization
Answer: A
Conceptual Explanation: Book value of equity is the difference between the book value of
assets and the book value of liabilities.
3. An increase in which of the following will decrease the present value of a future cash flow,
all else being equal?
A. The cash flow amount
B. The discount rate
C. The growth rate
D. The reinvestment rate
Answer: B
Conceptual Explanation: The present value formula PV = FV / (1 + r)^n shows that an
increase in ‘r’ (discount rate) decreases the PV.
4. What is the Effective Annual Rate (EAR) for a bank account that pays a 6% APR
compounded monthly?
A. 6.00%
B. 6.12%
, C. 6.25%
D. 6.17%
Answer: D
Conceptual Explanation: EAR = (1 + 0.06/12)^12 - 1 = 6.1678%, rounded to 6.17%.
5. If the nominal interest rate is 8% and the inflation rate is 3%, what is the approximate real
interest rate according to the Fisher effect?
A. 5.0%
B. 11.0%
C. 4.85%
D. 2.67%
Answer: A
Conceptual Explanation: The approximate Fisher effect is Real Rate ≈ Nominal Rate -
Inflation Rate = 8% - 3% = 5%.
6. Which of the following bond types has the highest interest rate sensitivity (duration)?
A. A 10-year, 5% coupon bond
B. A 10-year zero-coupon bond
C. A 5-year zero-coupon bond
D. A 20-year bond with a 10% coupon
FINANCE - COMPREHENSIVE
ASSESSMENT QUESTIONS AND
CORRECT ANSWERS LATEST UPDATE
THIS YEAR
1. Which of the following business organizational forms subjects the owners to double
taxation?
A. Sole proprietorship
B. Partnership
C. Limited liability partnership
D. Corporation
Answer: D
Conceptual Explanation: In a corporation, profits are taxed at the corporate level and
then again at the personal level when distributed as dividends.
2. When analyzing a balance sheet, which of the following represents the theoretical amount
that would remain for shareholders if all assets were sold and all liabilities paid at book
value?
A. Book Value of Equity
,B. Net Working Capital
C. Total Assets
D. Market Capitalization
Answer: A
Conceptual Explanation: Book value of equity is the difference between the book value of
assets and the book value of liabilities.
3. An increase in which of the following will decrease the present value of a future cash flow,
all else being equal?
A. The cash flow amount
B. The discount rate
C. The growth rate
D. The reinvestment rate
Answer: B
Conceptual Explanation: The present value formula PV = FV / (1 + r)^n shows that an
increase in ‘r’ (discount rate) decreases the PV.
4. What is the Effective Annual Rate (EAR) for a bank account that pays a 6% APR
compounded monthly?
A. 6.00%
B. 6.12%
, C. 6.25%
D. 6.17%
Answer: D
Conceptual Explanation: EAR = (1 + 0.06/12)^12 - 1 = 6.1678%, rounded to 6.17%.
5. If the nominal interest rate is 8% and the inflation rate is 3%, what is the approximate real
interest rate according to the Fisher effect?
A. 5.0%
B. 11.0%
C. 4.85%
D. 2.67%
Answer: A
Conceptual Explanation: The approximate Fisher effect is Real Rate ≈ Nominal Rate -
Inflation Rate = 8% - 3% = 5%.
6. Which of the following bond types has the highest interest rate sensitivity (duration)?
A. A 10-year, 5% coupon bond
B. A 10-year zero-coupon bond
C. A 5-year zero-coupon bond
D. A 20-year bond with a 10% coupon
