FIN 5063 Week 2 Quiz | Questions and
Answers | 2026/2027 Update | 100% Correct -
Trine.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
100 exam-style multiple-choice questions. Each question includes the correct answer and a complete
rationale for focused revision.
COVERAGE
This quiz assesses understanding of core corporate finance concepts covered in Week 2, including financial
statement analysis, time value of money, risk and return, capital budgeting, and cost of capital. It is designed
for graduate students in finance and business programs.
STUDY GUIDE
Recommended duration: 1 hour. Passing target: 80%.
HIGHP - Page 1 of 32
,1. A firm has an ROE of 15% and a retention ratio of 60%. According to the sustainable
growth rate formula, what is the firm's sustainable growth rate?
[ ] A. 9.0%
[ ] B. 6.0%
[ ] C. 15.0%
[ ] D. 25.0%
CORRECT: A. 9.0%
The sustainable growth rate is calculated as ROE × retention ratio = 15% × 0.60 = 9.0%. This represents the
maximum growth rate a firm can achieve without external equity financing while maintaining a constant
debt-equity ratio. Options B, C, and D misapply the formula or confuse it with other ratios.
2. You invest $1,000 today at an annual interest rate of 8%, compounded quarterly. What is
the future value after 3 years?
[ ] A. $1,259.71
[ ] B. $1,240.00
[ ] C. $1,268.24
[ ] D. $1,272.00
CORRECT: C. $1,268.24
Using the formula FV = PV × (1 + r/m)^(m*t), where r=0.08, m=4, t=3: FV = 1000 × (1 + 0.02)^12 = 1000 ×
1.26824 = $1,268.24. Option A uses annual compounding, B uses simple interest, and D is a distractor.
3. A project requires an initial investment of $50,000 and generates annual cash flows of
$12,000 for 6 years. If the required rate of return is 10%, what is the project's NPV?
[ ] A. $2,263.50
[ ] B. $2,000.00
[ ] C. $3,000.00
[ ] D. $1,500.00
CORRECT: A. $2,263.50
NPV = -50,000 + 12,000 × PVIFA(10%,6). PVIFA = (1 - 1/1.1^6)/0.1 4.3553. 12,000 × 4.3553 = 52,263.60.
NPV = 52,263.60 - 50,000 = $2,263.60, closest to $2,263.50. Other options are incorrect calculations.
4. Which of the following best describes the difference between IRR and NPV when
evaluating mutually exclusive projects?
[ ] A. IRR assumes reinvestment at the IRR, while NPV assumes reinvestment at the cost of capital.
[ ] B. IRR and NPV always give the same ranking for mutually exclusive projects.
[ ] C. NPV is expressed as a percentage, while IRR is expressed in dollar terms.
HIGHP - Page 2 of 32
, [ ] D. IRR is preferred over NPV because it considers the scale of the investment.
CORRECT: A. IRR assumes reinvestment at the IRR, while NPV assumes reinvestment at the cost of
capital.
The IRR method implicitly assumes cash flows are reinvested at the IRR, which may be unrealistic, whereas
NPV assumes reinvestment at the cost of capital. This can lead to different rankings for mutually exclusive
projects. Options B, C, and D are incorrect statements about the methods.
5. A company has a beta of 1.2, the risk-free rate is 3%, and the market risk premium is
6%. According to the CAPM, what is the required return on equity?
[ ] A. 10.2%
[ ] B. 9.0%
[ ] C. 7.2%
[ ] D. 12.0%
CORRECT: A. 10.2%
CAPM: Required return = risk-free rate + beta × market risk premium = 3% + 1.2 × 6% = 3% + 7.2% = 10.2%.
Options B, C, and D result from misapplying the formula or using incorrect inputs.
6. Which of the following statements about the weighted average cost of capital (WACC) is
most accurate?
[ ] A. WACC is the average cost of all sources of financing, weighted by their market values.
[ ] B. WACC is used as the discount rate for all projects regardless of risk.
[ ] C. WACC decreases as the firm's tax rate decreases.
[ ] D. WACC is based on book values of debt and equity.
CORRECT: A. WACC is the average cost of all sources of financing, weighted by their market values.
WACC is calculated using the market values of debt and equity, weighted by their respective proportions, and
represents the average cost of capital. It should be adjusted for project risk (B is false). Tax rate affects the
after-tax cost of debt, so lower tax rates increase WACC (C is false). WACC uses market values, not book
values (D is false).
7. A firm has a current ratio of 2.0, a quick ratio of 1.2, and an inventory turnover of 5. If
the industry average inventory turnover is 8, what can be inferred about the firm's
inventory management?
[ ] A. The firm is holding excess inventory compared to industry norms.
[ ] B. The firm is more efficient in managing inventory than its peers.
[ ] C. The firm has a lower level of inventory than the industry average.
[ ] D. The firm's inventory turnover is not comparable to the industry average.
HIGHP - Page 3 of 32
, CORRECT: A. The firm is holding excess inventory compared to industry norms.
A lower inventory turnover (5 vs. 8) suggests the firm is holding more inventory relative to its sales, indicating
potential inefficiency or excess stock. Options B and C are incorrect because lower turnover means less
efficiency and higher inventory. Option D is not necessarily true; the ratios are comparable.
8. Which of the following is a key assumption of the Modigliani-Miller theorem with taxes?
[ ] A. Capital markets are perfect, but interest is tax-deductible.
[ ] B. There are no bankruptcy costs, but taxes exist.
[ ] C. Firms can borrow at the risk-free rate regardless of leverage.
[ ] D. All of the above.
CORRECT: D. All of the above.
The Modigliani-Miller theorem with taxes assumes perfect capital markets (no transaction costs, no
bankruptcy costs), but introduces corporate taxes, making debt tax-deductible. It also assumes firms can
borrow at the risk-free rate. Thus, all statements A, B, and C are correct assumptions.
9. A bond has a face value of $1,000, a coupon rate of 6% paid annually, and 10 years to
maturity. If the market interest rate is 8%, what is the bond's current price?
[ ] A. $865.80
[ ] B. $1,000.00
[ ] C. $1,134.20
[ ] D. $920.00
CORRECT: A. $865.80
Price = PV of coupons + PV of face value. Coupons = $60 per year for 10 years. PV coupons = 60 ×
PVIFA(8%,10) = 60 × 6.7101 = $402.60. PV face = 1000 / (1.08)^10 = $463.19. Total = $865.79, closest to
$865.80. Other options are incorrect.
10. Which of the following is NOT a limitation of the payback period method?
[ ] A. It ignores the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It is difficult to compute.
[ ] D. It does not consider the risk of the project.
CORRECT: C. It is difficult to compute.
The payback period is simple to compute, so saying it is difficult is false. It does ignore the time value of
money (A), ignores cash flows after payback (B), and does not explicitly consider risk (D). Thus, C is the
exception.
HIGHP - Page 4 of 32
Answers | 2026/2027 Update | 100% Correct -
Trine.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
100 exam-style multiple-choice questions. Each question includes the correct answer and a complete
rationale for focused revision.
COVERAGE
This quiz assesses understanding of core corporate finance concepts covered in Week 2, including financial
statement analysis, time value of money, risk and return, capital budgeting, and cost of capital. It is designed
for graduate students in finance and business programs.
STUDY GUIDE
Recommended duration: 1 hour. Passing target: 80%.
HIGHP - Page 1 of 32
,1. A firm has an ROE of 15% and a retention ratio of 60%. According to the sustainable
growth rate formula, what is the firm's sustainable growth rate?
[ ] A. 9.0%
[ ] B. 6.0%
[ ] C. 15.0%
[ ] D. 25.0%
CORRECT: A. 9.0%
The sustainable growth rate is calculated as ROE × retention ratio = 15% × 0.60 = 9.0%. This represents the
maximum growth rate a firm can achieve without external equity financing while maintaining a constant
debt-equity ratio. Options B, C, and D misapply the formula or confuse it with other ratios.
2. You invest $1,000 today at an annual interest rate of 8%, compounded quarterly. What is
the future value after 3 years?
[ ] A. $1,259.71
[ ] B. $1,240.00
[ ] C. $1,268.24
[ ] D. $1,272.00
CORRECT: C. $1,268.24
Using the formula FV = PV × (1 + r/m)^(m*t), where r=0.08, m=4, t=3: FV = 1000 × (1 + 0.02)^12 = 1000 ×
1.26824 = $1,268.24. Option A uses annual compounding, B uses simple interest, and D is a distractor.
3. A project requires an initial investment of $50,000 and generates annual cash flows of
$12,000 for 6 years. If the required rate of return is 10%, what is the project's NPV?
[ ] A. $2,263.50
[ ] B. $2,000.00
[ ] C. $3,000.00
[ ] D. $1,500.00
CORRECT: A. $2,263.50
NPV = -50,000 + 12,000 × PVIFA(10%,6). PVIFA = (1 - 1/1.1^6)/0.1 4.3553. 12,000 × 4.3553 = 52,263.60.
NPV = 52,263.60 - 50,000 = $2,263.60, closest to $2,263.50. Other options are incorrect calculations.
4. Which of the following best describes the difference between IRR and NPV when
evaluating mutually exclusive projects?
[ ] A. IRR assumes reinvestment at the IRR, while NPV assumes reinvestment at the cost of capital.
[ ] B. IRR and NPV always give the same ranking for mutually exclusive projects.
[ ] C. NPV is expressed as a percentage, while IRR is expressed in dollar terms.
HIGHP - Page 2 of 32
, [ ] D. IRR is preferred over NPV because it considers the scale of the investment.
CORRECT: A. IRR assumes reinvestment at the IRR, while NPV assumes reinvestment at the cost of
capital.
The IRR method implicitly assumes cash flows are reinvested at the IRR, which may be unrealistic, whereas
NPV assumes reinvestment at the cost of capital. This can lead to different rankings for mutually exclusive
projects. Options B, C, and D are incorrect statements about the methods.
5. A company has a beta of 1.2, the risk-free rate is 3%, and the market risk premium is
6%. According to the CAPM, what is the required return on equity?
[ ] A. 10.2%
[ ] B. 9.0%
[ ] C. 7.2%
[ ] D. 12.0%
CORRECT: A. 10.2%
CAPM: Required return = risk-free rate + beta × market risk premium = 3% + 1.2 × 6% = 3% + 7.2% = 10.2%.
Options B, C, and D result from misapplying the formula or using incorrect inputs.
6. Which of the following statements about the weighted average cost of capital (WACC) is
most accurate?
[ ] A. WACC is the average cost of all sources of financing, weighted by their market values.
[ ] B. WACC is used as the discount rate for all projects regardless of risk.
[ ] C. WACC decreases as the firm's tax rate decreases.
[ ] D. WACC is based on book values of debt and equity.
CORRECT: A. WACC is the average cost of all sources of financing, weighted by their market values.
WACC is calculated using the market values of debt and equity, weighted by their respective proportions, and
represents the average cost of capital. It should be adjusted for project risk (B is false). Tax rate affects the
after-tax cost of debt, so lower tax rates increase WACC (C is false). WACC uses market values, not book
values (D is false).
7. A firm has a current ratio of 2.0, a quick ratio of 1.2, and an inventory turnover of 5. If
the industry average inventory turnover is 8, what can be inferred about the firm's
inventory management?
[ ] A. The firm is holding excess inventory compared to industry norms.
[ ] B. The firm is more efficient in managing inventory than its peers.
[ ] C. The firm has a lower level of inventory than the industry average.
[ ] D. The firm's inventory turnover is not comparable to the industry average.
HIGHP - Page 3 of 32
, CORRECT: A. The firm is holding excess inventory compared to industry norms.
A lower inventory turnover (5 vs. 8) suggests the firm is holding more inventory relative to its sales, indicating
potential inefficiency or excess stock. Options B and C are incorrect because lower turnover means less
efficiency and higher inventory. Option D is not necessarily true; the ratios are comparable.
8. Which of the following is a key assumption of the Modigliani-Miller theorem with taxes?
[ ] A. Capital markets are perfect, but interest is tax-deductible.
[ ] B. There are no bankruptcy costs, but taxes exist.
[ ] C. Firms can borrow at the risk-free rate regardless of leverage.
[ ] D. All of the above.
CORRECT: D. All of the above.
The Modigliani-Miller theorem with taxes assumes perfect capital markets (no transaction costs, no
bankruptcy costs), but introduces corporate taxes, making debt tax-deductible. It also assumes firms can
borrow at the risk-free rate. Thus, all statements A, B, and C are correct assumptions.
9. A bond has a face value of $1,000, a coupon rate of 6% paid annually, and 10 years to
maturity. If the market interest rate is 8%, what is the bond's current price?
[ ] A. $865.80
[ ] B. $1,000.00
[ ] C. $1,134.20
[ ] D. $920.00
CORRECT: A. $865.80
Price = PV of coupons + PV of face value. Coupons = $60 per year for 10 years. PV coupons = 60 ×
PVIFA(8%,10) = 60 × 6.7101 = $402.60. PV face = 1000 / (1.08)^10 = $463.19. Total = $865.79, closest to
$865.80. Other options are incorrect.
10. Which of the following is NOT a limitation of the payback period method?
[ ] A. It ignores the time value of money.
[ ] B. It ignores cash flows after the payback period.
[ ] C. It is difficult to compute.
[ ] D. It does not consider the risk of the project.
CORRECT: C. It is difficult to compute.
The payback period is simple to compute, so saying it is difficult is false. It does ignore the time value of
money (A), ignores cash flows after payback (B), and does not explicitly consider risk (D). Thus, C is the
exception.
HIGHP - Page 4 of 32
