TEST BANK FOR
PRINCIPLES OF
CORPORATE FINANCE
15TH EDITION (2025) BY
BREALEY – COMPLETE
CHAPTERS 1-34 PDF
Exam: Principles of Corporate Finance (15th Edition)
Part One: Value (Chapters 1-6)
1. Which of the following is a corporate finance decision?
A. An acquisition of another company
B. A change in pricing strategy
C. A decision to carry less inventory
D. All of the above
Correct Answer: D
Rationale: All of the listed decisions are corporate finance decisions because they all
require financial resources and affect the firm's value .
,2. In the big picture of corporate finance, the investment principle states that firms
should:
A. Take investments that make them more profitable
B. Take investments that generate the most cash flows
C. Take investments that earn returns greater than the risk-adjusted hurdle rate
D. Take investments that earn returns greater than the risk-free rate
Correct Answer: C
Rationale: It is not enough that investments are profitable or that they earn more than
the risk-free rate. The projects earning the highest returns may not be good enough if
they are very risky. The correct benchmark is the risk-adjusted hurdle rate .
3. According to the financing principle, firms should borrow:
A. Debt with the lowest interest rate attached to it
B. The longest term debt that they can get
C. Debt in the same currency that their cash flows are in
D. Debt in their local currency
Correct Answer: C
Rationale: Using the cheapest debt or the longest term debt may not make sense if the
debt is not matched up to the cash flows on the assets. Mismatching debt to assets
increases default risk .
4. According to the dividend principle, which firms should return more cash to
stockholders?
A. Firms that have high earnings and high growth potential
B. Firms that have high earnings and low growth potential
C. Firms that have low earnings and high growth potential
D. Firms that have low earnings and low growth potential
Correct Answer: B
Rationale: It is a combination of having lots of earnings (cash flows) and not that much
to invest those cash flows in that creates the opportunity to return more cash .
5. What does the Net Present Value (NPV) rule suggest regarding investment
decisions?
,A. Accept a project if its NPV is negative
B. Accept a project if its NPV is positive
C. Accept a project if its NPV equals zero
D. NPV is irrelevant to investment decisions
Correct Answer: B
Rationale: The NPV rule states that an investment should be made if the net present
value is positive .
6. Which of the following statements regarding the NPV rule and the rate of
return rule is NOT true?
A. Accept a project if its NPV > 0
B. Reject a project if the NPV < 0
C. Accept a project if its rate of return > 0
D. Accept a project if its rate of return > opportunity cost of capital
Correct Answer: C
Rationale: Accepting a project simply because its rate of return is greater than zero is
incorrect. The rate of return must exceed the opportunity cost of capital .
7. The opportunity cost of capital for a risky project is:
A. The expected rate of return on a government security having the same maturity as
the project
B. The expected rate of return on a well-diversified portfolio of common stocks
C. The expected rate of return on a portfolio of securities of similar risks as the project
D. The risk-free rate
Correct Answer: C
Rationale: The opportunity cost of capital is the expected rate of return on a portfolio
of securities of similar risks as the project .
8. The present value formula for one period cash flow is:
A. PV = C1(1 + r)
B. PV = C1 / (1 + r)
C. PV = C1 / r
D. PV = C1 × r
, Correct Answer: B
Rationale: The present value of a one-period cash flow is the future cash flow divided
by one plus the discount rate .
9. A perpetuity is defined as:
A. Equal cash flows at equal intervals of time for a specific number of periods
B. Equal cash flows at equal intervals of time forever
C. Unequal cash flows at equal intervals of time forever
D. A single cash flow at a future date
Correct Answer: B
Rationale: A perpetuity is a stream of equal cash flows that occurs at equal intervals and
lasts forever .
10. The rate of return is also called:
I) discount rate
II) hurdle rate
III) opportunity cost of capital
A. I only
B. I and II only
C. I, II, and III
D. None of the above
Correct Answer: C
Rationale: The rate of return is synonymous with the discount rate, hurdle rate, and
opportunity cost of capital .
Part Two: Risk (Chapters 7-9)
11. The company cost of capital is the appropriate discount rate for a firm's:
A. High-risk projects
B. Low-risk projects
C. Average-risk projects
D. All projects regardless of risk
PRINCIPLES OF
CORPORATE FINANCE
15TH EDITION (2025) BY
BREALEY – COMPLETE
CHAPTERS 1-34 PDF
Exam: Principles of Corporate Finance (15th Edition)
Part One: Value (Chapters 1-6)
1. Which of the following is a corporate finance decision?
A. An acquisition of another company
B. A change in pricing strategy
C. A decision to carry less inventory
D. All of the above
Correct Answer: D
Rationale: All of the listed decisions are corporate finance decisions because they all
require financial resources and affect the firm's value .
,2. In the big picture of corporate finance, the investment principle states that firms
should:
A. Take investments that make them more profitable
B. Take investments that generate the most cash flows
C. Take investments that earn returns greater than the risk-adjusted hurdle rate
D. Take investments that earn returns greater than the risk-free rate
Correct Answer: C
Rationale: It is not enough that investments are profitable or that they earn more than
the risk-free rate. The projects earning the highest returns may not be good enough if
they are very risky. The correct benchmark is the risk-adjusted hurdle rate .
3. According to the financing principle, firms should borrow:
A. Debt with the lowest interest rate attached to it
B. The longest term debt that they can get
C. Debt in the same currency that their cash flows are in
D. Debt in their local currency
Correct Answer: C
Rationale: Using the cheapest debt or the longest term debt may not make sense if the
debt is not matched up to the cash flows on the assets. Mismatching debt to assets
increases default risk .
4. According to the dividend principle, which firms should return more cash to
stockholders?
A. Firms that have high earnings and high growth potential
B. Firms that have high earnings and low growth potential
C. Firms that have low earnings and high growth potential
D. Firms that have low earnings and low growth potential
Correct Answer: B
Rationale: It is a combination of having lots of earnings (cash flows) and not that much
to invest those cash flows in that creates the opportunity to return more cash .
5. What does the Net Present Value (NPV) rule suggest regarding investment
decisions?
,A. Accept a project if its NPV is negative
B. Accept a project if its NPV is positive
C. Accept a project if its NPV equals zero
D. NPV is irrelevant to investment decisions
Correct Answer: B
Rationale: The NPV rule states that an investment should be made if the net present
value is positive .
6. Which of the following statements regarding the NPV rule and the rate of
return rule is NOT true?
A. Accept a project if its NPV > 0
B. Reject a project if the NPV < 0
C. Accept a project if its rate of return > 0
D. Accept a project if its rate of return > opportunity cost of capital
Correct Answer: C
Rationale: Accepting a project simply because its rate of return is greater than zero is
incorrect. The rate of return must exceed the opportunity cost of capital .
7. The opportunity cost of capital for a risky project is:
A. The expected rate of return on a government security having the same maturity as
the project
B. The expected rate of return on a well-diversified portfolio of common stocks
C. The expected rate of return on a portfolio of securities of similar risks as the project
D. The risk-free rate
Correct Answer: C
Rationale: The opportunity cost of capital is the expected rate of return on a portfolio
of securities of similar risks as the project .
8. The present value formula for one period cash flow is:
A. PV = C1(1 + r)
B. PV = C1 / (1 + r)
C. PV = C1 / r
D. PV = C1 × r
, Correct Answer: B
Rationale: The present value of a one-period cash flow is the future cash flow divided
by one plus the discount rate .
9. A perpetuity is defined as:
A. Equal cash flows at equal intervals of time for a specific number of periods
B. Equal cash flows at equal intervals of time forever
C. Unequal cash flows at equal intervals of time forever
D. A single cash flow at a future date
Correct Answer: B
Rationale: A perpetuity is a stream of equal cash flows that occurs at equal intervals and
lasts forever .
10. The rate of return is also called:
I) discount rate
II) hurdle rate
III) opportunity cost of capital
A. I only
B. I and II only
C. I, II, and III
D. None of the above
Correct Answer: C
Rationale: The rate of return is synonymous with the discount rate, hurdle rate, and
opportunity cost of capital .
Part Two: Risk (Chapters 7-9)
11. The company cost of capital is the appropriate discount rate for a firm's:
A. High-risk projects
B. Low-risk projects
C. Average-risk projects
D. All projects regardless of risk
