MASTER OF BUSINESS ADMINISTRATION (MBA) LATEST UPDATED 2026
COMPREHENSIVE EXAM QUESTIONS AND CORRECT ANSWERS
1. What is the primary goal of financial management? The primary goal is to
maximize shareholder wealth by maximizing the firm's stock price through
efficient allocation of resources and optimal capital structure decisions.
2. What is the difference between accounting profit and economic profit?
Accounting profit is revenue minus explicit costs, while economic profit also
deducts implicit costs (opportunity costs) including the cost of capital
employed.
3. Define working capital. Working capital is the difference between current
assets and current liabilities, representing the funds available for day-to-day
operations.
4. What is the Time Value of Money (TVM)? TVM is the concept that money
available today is worth more than the same amount in the future due to its
potential earning capacity.
5. What is Net Present Value (NPV)? NPV is the difference between the
present value of cash inflows and outflows over a period, used to evaluate
investment profitability.
6. Explain the Capital Asset Pricing Model (CAPM). CAPM describes the
relationship between systematic risk and expected return, calculated as:
Expected Return = Risk-free rate + Beta × (Market return - Risk-free rate).
7. What is beta in finance? Beta measures a stock's volatility relative to the
overall market. A beta of 1 means the stock moves with the market, >1 is more
volatile, <1 is less volatile.
8. Define leverage in financial terms. Leverage refers to using borrowed
capital (debt) to increase the potential return on investment, which also
increases risk.
,9. What is the difference between operating leverage and financial
leverage? Operating leverage relates to fixed operating costs affecting EBIT,
while financial leverage involves using debt to affect returns to equity holders.
10. What is the Weighted Average Cost of Capital (WACC)? WACC is the
average rate a company expects to pay to finance its assets, weighted by the
proportion of debt and equity in its capital structure.
11. Explain the concept of liquidity. Liquidity refers to how quickly an asset
can be converted to cash without significant loss of value.
12. What are the main liquidity ratios? Current ratio, quick ratio (acid-test
ratio), and cash ratio are the primary liquidity ratios.
13. What is the Debt-to-Equity ratio? It measures a company's financial
leverage by dividing total liabilities by shareholder equity, indicating the
relative proportion of debt and equity financing.
14. Define Return on Equity (ROE). ROE measures profitability by revealing
how much profit a company generates with shareholders' equity: Net Income /
Shareholder Equity.
15. What is Return on Assets (ROA)? ROA indicates how efficiently a
company uses its assets to generate profit: Net Income / Total Assets.
16. Explain the DuPont Analysis. DuPont Analysis breaks down ROE into
three components: profit margin, asset turnover, and financial leverage (equity
multiplier).
17. What is dividend policy? Dividend policy determines how much of a
company's earnings will be paid to shareholders as dividends versus retained for
reinvestment.
18. Define retained earnings. Retained earnings are the cumulative net income
a company has kept (not paid as dividends) to reinvest in the business.
19. What is a stock split? A stock split increases the number of shares
outstanding while proportionally reducing the share price, maintaining overall
market capitalization.
20. Explain the pecking order theory. This theory suggests companies prefer
internal financing first, then debt, and equity as a last resort due to information
asymmetry costs.
, 21. What is the agency problem? The agency problem arises when managers
(agents) pursue their own interests rather than maximizing shareholder
(principals) wealth.
22. Define efficient market hypothesis (EMH). EMH suggests that asset
prices fully reflect all available information, making it impossible to
consistently achieve above-average returns.
23. What are the three forms of market efficiency? Weak form (past prices
reflected), semi-strong form (all public information reflected), and strong form
(all information including insider knowledge reflected).
24. What is capital budgeting? Capital budgeting is the process of evaluating
and selecting long-term investments that are worth more than they cost.
25. Explain the payback period. The payback period is the time required for
cumulative cash inflows to equal the initial investment.
26. What is the Internal Rate of Return (IRR)? IRR is the discount rate that
makes the NPV of all cash flows equal to zero, representing the project's
expected return.
27. What is the profitability index? The profitability index is the ratio of the
present value of future cash flows to the initial investment (PV of cash flows /
Initial investment).
28. Define sunk costs. Sunk costs are past expenditures that cannot be
recovered and should not influence current investment decisions.
29. What is opportunity cost? Opportunity cost is the value of the next best
alternative foregone when making a decision.
30. Explain the concept of risk and return trade-off. Higher returns typically
require accepting higher risk; investors must balance their desired return against
their risk tolerance.
31. What is diversification? Diversification is spreading investments across
various assets to reduce overall portfolio risk.
32. Define systematic and unsystematic risk. Systematic risk affects the entire
market and cannot be diversified away, while unsystematic risk is company-
specific and can be reduced through diversification.
33. What is a bond's yield to maturity (YTM)? YTM is the total return
anticipated on a bond if held until maturity, accounting for current price, coupon
payments, and time to maturity.
COMPREHENSIVE EXAM QUESTIONS AND CORRECT ANSWERS
1. What is the primary goal of financial management? The primary goal is to
maximize shareholder wealth by maximizing the firm's stock price through
efficient allocation of resources and optimal capital structure decisions.
2. What is the difference between accounting profit and economic profit?
Accounting profit is revenue minus explicit costs, while economic profit also
deducts implicit costs (opportunity costs) including the cost of capital
employed.
3. Define working capital. Working capital is the difference between current
assets and current liabilities, representing the funds available for day-to-day
operations.
4. What is the Time Value of Money (TVM)? TVM is the concept that money
available today is worth more than the same amount in the future due to its
potential earning capacity.
5. What is Net Present Value (NPV)? NPV is the difference between the
present value of cash inflows and outflows over a period, used to evaluate
investment profitability.
6. Explain the Capital Asset Pricing Model (CAPM). CAPM describes the
relationship between systematic risk and expected return, calculated as:
Expected Return = Risk-free rate + Beta × (Market return - Risk-free rate).
7. What is beta in finance? Beta measures a stock's volatility relative to the
overall market. A beta of 1 means the stock moves with the market, >1 is more
volatile, <1 is less volatile.
8. Define leverage in financial terms. Leverage refers to using borrowed
capital (debt) to increase the potential return on investment, which also
increases risk.
,9. What is the difference between operating leverage and financial
leverage? Operating leverage relates to fixed operating costs affecting EBIT,
while financial leverage involves using debt to affect returns to equity holders.
10. What is the Weighted Average Cost of Capital (WACC)? WACC is the
average rate a company expects to pay to finance its assets, weighted by the
proportion of debt and equity in its capital structure.
11. Explain the concept of liquidity. Liquidity refers to how quickly an asset
can be converted to cash without significant loss of value.
12. What are the main liquidity ratios? Current ratio, quick ratio (acid-test
ratio), and cash ratio are the primary liquidity ratios.
13. What is the Debt-to-Equity ratio? It measures a company's financial
leverage by dividing total liabilities by shareholder equity, indicating the
relative proportion of debt and equity financing.
14. Define Return on Equity (ROE). ROE measures profitability by revealing
how much profit a company generates with shareholders' equity: Net Income /
Shareholder Equity.
15. What is Return on Assets (ROA)? ROA indicates how efficiently a
company uses its assets to generate profit: Net Income / Total Assets.
16. Explain the DuPont Analysis. DuPont Analysis breaks down ROE into
three components: profit margin, asset turnover, and financial leverage (equity
multiplier).
17. What is dividend policy? Dividend policy determines how much of a
company's earnings will be paid to shareholders as dividends versus retained for
reinvestment.
18. Define retained earnings. Retained earnings are the cumulative net income
a company has kept (not paid as dividends) to reinvest in the business.
19. What is a stock split? A stock split increases the number of shares
outstanding while proportionally reducing the share price, maintaining overall
market capitalization.
20. Explain the pecking order theory. This theory suggests companies prefer
internal financing first, then debt, and equity as a last resort due to information
asymmetry costs.
, 21. What is the agency problem? The agency problem arises when managers
(agents) pursue their own interests rather than maximizing shareholder
(principals) wealth.
22. Define efficient market hypothesis (EMH). EMH suggests that asset
prices fully reflect all available information, making it impossible to
consistently achieve above-average returns.
23. What are the three forms of market efficiency? Weak form (past prices
reflected), semi-strong form (all public information reflected), and strong form
(all information including insider knowledge reflected).
24. What is capital budgeting? Capital budgeting is the process of evaluating
and selecting long-term investments that are worth more than they cost.
25. Explain the payback period. The payback period is the time required for
cumulative cash inflows to equal the initial investment.
26. What is the Internal Rate of Return (IRR)? IRR is the discount rate that
makes the NPV of all cash flows equal to zero, representing the project's
expected return.
27. What is the profitability index? The profitability index is the ratio of the
present value of future cash flows to the initial investment (PV of cash flows /
Initial investment).
28. Define sunk costs. Sunk costs are past expenditures that cannot be
recovered and should not influence current investment decisions.
29. What is opportunity cost? Opportunity cost is the value of the next best
alternative foregone when making a decision.
30. Explain the concept of risk and return trade-off. Higher returns typically
require accepting higher risk; investors must balance their desired return against
their risk tolerance.
31. What is diversification? Diversification is spreading investments across
various assets to reduce overall portfolio risk.
32. Define systematic and unsystematic risk. Systematic risk affects the entire
market and cannot be diversified away, while unsystematic risk is company-
specific and can be reduced through diversification.
33. What is a bond's yield to maturity (YTM)? YTM is the total return
anticipated on a bond if held until maturity, accounting for current price, coupon
payments, and time to maturity.
