FIN 300 FINAL EXAM - ADVANCED
FINANCIAL MANAGEMENT |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. If the Federal Reserve increases the money supply significantly, causing inflation
expectations to rise, what is the most likely impact on the Security Market Line (SML)?
A. The SML will rotate counter-clockwise, becoming steeper.
B. The SML will rotate clockwise, becoming flatter.
C. The SML will shift downward parallel to its original position.
D. The SML will shift upward parallel to its original position.
Answer: D
Conceptual Explanation: An increase in inflation expectations increases the risk-free rate
(Rf). In the CAPM formula, a higher Rf increases the intercept, shifting the SML upward
parallelly, assuming the market risk premium remains constant.
2. Which of the following scenarios would lead to a project having multiple Internal Rates of
Return (IRR)?
A. The project has a very high initial investment and very low salvage value.
B. The project’s Net Present Value (NPV) is negative at all discount rates.
,C. The project’s cash flows change sign more than once over its life.
D. The project is mutually exclusive with another project of a different scale.
Answer: C
Conceptual Explanation: According to Descartes’ Rule of Signs, the number of IRRs can be
as many as the number of sign changes in the cash flow stream. Non-conventional cash
flows (e.g., -, +, -) result in multiple IRRs.
3. A company is considering two mutually exclusive projects with different lifespans. Project
A lasts 3 years and Project B lasts 6 years. Which method is most appropriate for comparison?
A. Profitability Index (PI)
B. Equivalent Annual Annuity (EAA)
C. Internal Rate of Return (IRR)
D. Modified Internal Rate of Return (MIRR)
Answer: B
Conceptual Explanation: When comparing mutually exclusive projects with unequal lives,
the EAA or the replacement chain method should be used to provide a fair comparison on
an annualized basis.
, 4. In the context of the Modigliani-Miller Theorem (with corporate taxes but no distress
costs), what happens to the Weighted Average Cost of Capital (WACC) as a firm increases its
leverage?
A. WACC decreases because of the tax shield benefit of debt.
B. WACC increases because the cost of equity rises due to financial risk.
C. WACC remains constant regardless of the debt-to-equity ratio.
D. WACC first decreases and then increases as bankruptcy risk becomes relevant.
Answer: A
Conceptual Explanation: Under MM Proposition I with taxes, the value of the firm
increases with debt due to the interest tax shield, which lowers the WACC as leverage
increases.
5. A 10-year bond with a 6% annual coupon is currently selling for $1,050. If market interest
rates suddenly rise by 1%, what will happen to the bond’s price?
A. It will increase because the coupon rate is fixed.
B. It will decrease, and the percentage decrease will be greater if the bond had a longer
maturity.
C. It will decrease, and the percentage decrease will be smaller if the bond had a lower
coupon.
D. It will stay the same because the par value does not change.
FINANCIAL MANAGEMENT |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. If the Federal Reserve increases the money supply significantly, causing inflation
expectations to rise, what is the most likely impact on the Security Market Line (SML)?
A. The SML will rotate counter-clockwise, becoming steeper.
B. The SML will rotate clockwise, becoming flatter.
C. The SML will shift downward parallel to its original position.
D. The SML will shift upward parallel to its original position.
Answer: D
Conceptual Explanation: An increase in inflation expectations increases the risk-free rate
(Rf). In the CAPM formula, a higher Rf increases the intercept, shifting the SML upward
parallelly, assuming the market risk premium remains constant.
2. Which of the following scenarios would lead to a project having multiple Internal Rates of
Return (IRR)?
A. The project has a very high initial investment and very low salvage value.
B. The project’s Net Present Value (NPV) is negative at all discount rates.
,C. The project’s cash flows change sign more than once over its life.
D. The project is mutually exclusive with another project of a different scale.
Answer: C
Conceptual Explanation: According to Descartes’ Rule of Signs, the number of IRRs can be
as many as the number of sign changes in the cash flow stream. Non-conventional cash
flows (e.g., -, +, -) result in multiple IRRs.
3. A company is considering two mutually exclusive projects with different lifespans. Project
A lasts 3 years and Project B lasts 6 years. Which method is most appropriate for comparison?
A. Profitability Index (PI)
B. Equivalent Annual Annuity (EAA)
C. Internal Rate of Return (IRR)
D. Modified Internal Rate of Return (MIRR)
Answer: B
Conceptual Explanation: When comparing mutually exclusive projects with unequal lives,
the EAA or the replacement chain method should be used to provide a fair comparison on
an annualized basis.
, 4. In the context of the Modigliani-Miller Theorem (with corporate taxes but no distress
costs), what happens to the Weighted Average Cost of Capital (WACC) as a firm increases its
leverage?
A. WACC decreases because of the tax shield benefit of debt.
B. WACC increases because the cost of equity rises due to financial risk.
C. WACC remains constant regardless of the debt-to-equity ratio.
D. WACC first decreases and then increases as bankruptcy risk becomes relevant.
Answer: A
Conceptual Explanation: Under MM Proposition I with taxes, the value of the firm
increases with debt due to the interest tax shield, which lowers the WACC as leverage
increases.
5. A 10-year bond with a 6% annual coupon is currently selling for $1,050. If market interest
rates suddenly rise by 1%, what will happen to the bond’s price?
A. It will increase because the coupon rate is fixed.
B. It will decrease, and the percentage decrease will be greater if the bond had a longer
maturity.
C. It will decrease, and the percentage decrease will be smaller if the bond had a lower
coupon.
D. It will stay the same because the par value does not change.
