FINA 365 — UNL | Exam 1 Practice Examination
FINA 365 — University of Nebraska–Lincoln
— Exam 1 Examination with Verified
Answers and Rationales
Introduction
This study and assessment document contains practice examination
questions for FINA 365 Exam 1, covering core financial concepts such
as time value of money, compounding, bond coupon payments, and
capital budgeting cash flows. It includes multiple-choice and true-or-
false questions with answers and explanatory rationales to support
exam preparation. The material is organized as an extensive Exam 1
practice set and focuses on applying fundamental finance formulas
and concepts.
Exam Questions and Answers
Instructions: This is an examination designed for study and review.
Each item is followed by the correct answer and a concise rationale.
Page 1
, FINA 365 — UNL | Exam 1 Practice Examination
1. True or False: The time value of money means that a dollar
available today can generally have a different economic value than a
dollar received in the future.
Answer: True
Rationale: Money available today can be invested or otherwise used
to produce a return, so timing affects economic value.
2. Which expression correctly represents the future value of a single
amount invested for n periods at a periodic rate r?
A. PV(1+r)^n
B. PV/(1+r)^n
C. PV+r+n
D. PV(1−r)^n
Answer: A
Rationale: Future value compounds the present amount by
multiplying it by (1+r)^n.
3. True or False: A positive net present value project necessarily
destroys shareholder value.
Answer: False
Rationale: A positive NPV indicates that the project's present value
of expected benefits exceeds its cost, which is generally value
creating.
4. A firm evaluates a project with expected cash flows using a
required return that reflects the project's risk. Which technique
Page 2
, FINA 365 — UNL | Exam 1 Practice Examination
directly compares the present value of expected cash inflows with the
investment?
A. Accounting rate of return
B. Net present value
C. Inventory turnover
D. Gross margin
Answer: B
Rationale: NPV discounts expected incremental cash flows at the
required return and subtracts the initial investment.
5. True or False: If two investments have the same future cash flow,
the investment with the higher required return will have the higher
present value.
Answer: False
Rationale: A higher discount rate reduces present value when the
future cash flow is unchanged.
6. If a present value is fixed and the discount rate rises, what
normally happens to the present value of a fixed future cash flow?
A. It rises
B. It falls
C. It remains unchanged
D. It becomes equal to the face value
Answer: B
Rationale: Present value equals future cash flow divided by a factor
that increases with the discount rate.
Page 3
, FINA 365 — UNL | Exam 1 Practice Examination
7. True or False: An annuity consists of equal cash flows occurring at
regular intervals.
Answer: True
Rationale: That is the defining cash-flow pattern of an ordinary
annuity or annuity due, depending on timing.
8. An investment pays $500 at the end of each year for five years.
What type of cash-flow pattern is this?
A. Growing perpetuity
B. Ordinary annuity
C. Single lump sum
D. Irregular perpetuity
Answer: B
Rationale: Equal payments at regular intervals constitute an
annuity; end-of-period payments are an ordinary annuity.
9. True or False: Compounding frequency can affect the future value
of an investment when the quoted annual rate is held constant.
Answer: True
Rationale: More frequent compounding generally produces a higher
effective annual return when the nominal rate is positive.
10. Which change would increase the future value of a positive initial
investment, assuming the number of periods is unchanged?
A. Lowering the positive interest rate
B. Increasing the positive interest rate
C. Removing compounding
Page 4
FINA 365 — University of Nebraska–Lincoln
— Exam 1 Examination with Verified
Answers and Rationales
Introduction
This study and assessment document contains practice examination
questions for FINA 365 Exam 1, covering core financial concepts such
as time value of money, compounding, bond coupon payments, and
capital budgeting cash flows. It includes multiple-choice and true-or-
false questions with answers and explanatory rationales to support
exam preparation. The material is organized as an extensive Exam 1
practice set and focuses on applying fundamental finance formulas
and concepts.
Exam Questions and Answers
Instructions: This is an examination designed for study and review.
Each item is followed by the correct answer and a concise rationale.
Page 1
, FINA 365 — UNL | Exam 1 Practice Examination
1. True or False: The time value of money means that a dollar
available today can generally have a different economic value than a
dollar received in the future.
Answer: True
Rationale: Money available today can be invested or otherwise used
to produce a return, so timing affects economic value.
2. Which expression correctly represents the future value of a single
amount invested for n periods at a periodic rate r?
A. PV(1+r)^n
B. PV/(1+r)^n
C. PV+r+n
D. PV(1−r)^n
Answer: A
Rationale: Future value compounds the present amount by
multiplying it by (1+r)^n.
3. True or False: A positive net present value project necessarily
destroys shareholder value.
Answer: False
Rationale: A positive NPV indicates that the project's present value
of expected benefits exceeds its cost, which is generally value
creating.
4. A firm evaluates a project with expected cash flows using a
required return that reflects the project's risk. Which technique
Page 2
, FINA 365 — UNL | Exam 1 Practice Examination
directly compares the present value of expected cash inflows with the
investment?
A. Accounting rate of return
B. Net present value
C. Inventory turnover
D. Gross margin
Answer: B
Rationale: NPV discounts expected incremental cash flows at the
required return and subtracts the initial investment.
5. True or False: If two investments have the same future cash flow,
the investment with the higher required return will have the higher
present value.
Answer: False
Rationale: A higher discount rate reduces present value when the
future cash flow is unchanged.
6. If a present value is fixed and the discount rate rises, what
normally happens to the present value of a fixed future cash flow?
A. It rises
B. It falls
C. It remains unchanged
D. It becomes equal to the face value
Answer: B
Rationale: Present value equals future cash flow divided by a factor
that increases with the discount rate.
Page 3
, FINA 365 — UNL | Exam 1 Practice Examination
7. True or False: An annuity consists of equal cash flows occurring at
regular intervals.
Answer: True
Rationale: That is the defining cash-flow pattern of an ordinary
annuity or annuity due, depending on timing.
8. An investment pays $500 at the end of each year for five years.
What type of cash-flow pattern is this?
A. Growing perpetuity
B. Ordinary annuity
C. Single lump sum
D. Irregular perpetuity
Answer: B
Rationale: Equal payments at regular intervals constitute an
annuity; end-of-period payments are an ordinary annuity.
9. True or False: Compounding frequency can affect the future value
of an investment when the quoted annual rate is held constant.
Answer: True
Rationale: More frequent compounding generally produces a higher
effective annual return when the nominal rate is positive.
10. Which change would increase the future value of a positive initial
investment, assuming the number of periods is unchanged?
A. Lowering the positive interest rate
B. Increasing the positive interest rate
C. Removing compounding
Page 4
