FIN 300 FINAL EXAM PART 2 -
ADVANCED CORPORATE FINANCE |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. Which of the following best describes the ‘Agency Problem’ in corporate finance?
A. The competition between two different agencies providing the same service.
B. The disagreement between the board of directors and the government regarding taxes.
C. The conflict of interest between a firm’s managers and its shareholders.
D. The failure of a company to meet its debt obligations to a lending agency.
Answer: C
Conceptual Explanation: The agency problem occurs when managers (agents) act in their
own interest rather than the interests of the shareholders (principals).
2. According to the Pecking Order Theory, how do firms prefer to finance their operations?
A. New equity, then debt, then internal funds.
B. New equity, then internal funds, then debt.
C. Debt, then internal funds, then new equity.
D. Internal funds, then debt, then new equity.
,Answer: D
Conceptual Explanation: Pecking Order Theory suggests firms use internal funds first,
then debt, and equity as a last resort due to asymmetric information.
3. What is the Weighted Average Cost of Capital (WACC) for a firm with 40% debt at 8% cost
and 60% equity at 12% cost? (Assume no taxes)
A. 9.6%
B. 10.0%
C. 10.4%
D. 11.2%
Answer: C
Conceptual Explanation: WACC = (0.4 * 0.08) + (0.6 * 0.12) = 0.032 + 0.072 = 0.104 or
10.4%.
4. The Capital Asset Pricing Model (CAPM) calculates the required return on equity based on
which type of risk?
A. Systematic risk
B. Unsystematic risk
C. Total risk
D. Business risk only
Answer: A
, Conceptual Explanation: CAPM uses Beta, which measures systematic (non-diversifiable)
risk.
5. If the Net Present Value (NPV) of a project is positive, the Internal Rate of Return (IRR)
must be:
A. Lower than the cost of capital.
B. Greater than the cost of capital.
C. Equal to the cost of capital.
D. Zero.
Answer: B
Conceptual Explanation: A positive NPV indicates that the project’s return (IRR) exceeds
the required rate of return (cost of capital).
6. Which of the following is considered a ‘sunk cost’ in capital budgeting?
A. The cost of a new machine.
B. Interest payments on debt used to finance the project.
C. The salvage value of the old machine.
D. Marketing research conducted last year to evaluate the project’s feasibility.
Answer: D
Conceptual Explanation: Sunk costs are expenses already incurred that cannot be
recovered and should not influence future decisions.
ADVANCED CORPORATE FINANCE |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. Which of the following best describes the ‘Agency Problem’ in corporate finance?
A. The competition between two different agencies providing the same service.
B. The disagreement between the board of directors and the government regarding taxes.
C. The conflict of interest between a firm’s managers and its shareholders.
D. The failure of a company to meet its debt obligations to a lending agency.
Answer: C
Conceptual Explanation: The agency problem occurs when managers (agents) act in their
own interest rather than the interests of the shareholders (principals).
2. According to the Pecking Order Theory, how do firms prefer to finance their operations?
A. New equity, then debt, then internal funds.
B. New equity, then internal funds, then debt.
C. Debt, then internal funds, then new equity.
D. Internal funds, then debt, then new equity.
,Answer: D
Conceptual Explanation: Pecking Order Theory suggests firms use internal funds first,
then debt, and equity as a last resort due to asymmetric information.
3. What is the Weighted Average Cost of Capital (WACC) for a firm with 40% debt at 8% cost
and 60% equity at 12% cost? (Assume no taxes)
A. 9.6%
B. 10.0%
C. 10.4%
D. 11.2%
Answer: C
Conceptual Explanation: WACC = (0.4 * 0.08) + (0.6 * 0.12) = 0.032 + 0.072 = 0.104 or
10.4%.
4. The Capital Asset Pricing Model (CAPM) calculates the required return on equity based on
which type of risk?
A. Systematic risk
B. Unsystematic risk
C. Total risk
D. Business risk only
Answer: A
, Conceptual Explanation: CAPM uses Beta, which measures systematic (non-diversifiable)
risk.
5. If the Net Present Value (NPV) of a project is positive, the Internal Rate of Return (IRR)
must be:
A. Lower than the cost of capital.
B. Greater than the cost of capital.
C. Equal to the cost of capital.
D. Zero.
Answer: B
Conceptual Explanation: A positive NPV indicates that the project’s return (IRR) exceeds
the required rate of return (cost of capital).
6. Which of the following is considered a ‘sunk cost’ in capital budgeting?
A. The cost of a new machine.
B. Interest payments on debt used to finance the project.
C. The salvage value of the old machine.
D. Marketing research conducted last year to evaluate the project’s feasibility.
Answer: D
Conceptual Explanation: Sunk costs are expenses already incurred that cannot be
recovered and should not influence future decisions.
