MBA 701 Final Exam Study Guide | Questions and
Answers | 2026 Update | 100% Correct - LSUS
1. Two mutually exclusive projects have the following characteristics: Project A has a
higher IRR but a lower NPV (at the firm's cost of capital) compared to Project B. The
projects have different scales and timing of cash flows. According to standard capital
budgeting theory, which project should be accepted?
A. Project A, because IRR is the preferred metric for mutually exclusive projects
B. Project B, because NPV is the preferred metric for mutually exclusive projects
C. Either project, as the conflict indicates the projects have equal economic value
D. Neither project; the firm should seek projects with both higher NPV and IRR
Answer: B
Rationale: NPV directly measures the increase in firm value and correctly handles scale and
timing differences. IRR can be misleading for mutually exclusive projects due to the reinvestment
rate assumption and scale effects. Therefore, the project with the higher NPV should be chosen.
2. A luxury brand known for exclusivity and high quality considers launching a mid-range
product line. Brand extension research suggests that if consumers perceive the extension as
incongruent with the parent brand's image and of lower quality, the most likely outcome
for the parent brand is:
A. Enhanced brand image due to increased market reach
B. No significant change in brand equity
C. Dilution of brand equity, especially if the extension is high-profile
D. Strengthening of brand loyalty among existing customers
Answer: C
Rationale: Classic brand extension literature (e.g., Aaker, Loken) shows that incongruent
extensions perceived as lower quality can dilute parent brand associations through a process of
'dilution effect'. This is particularly risky for luxury brands extending downward.
3. A meta-analysis of the relationship between job satisfaction and job performance found
a corrected correlation coefficient of approximately 0.30. This finding is best interpreted
as:
A. A strong causal effect of satisfaction on performance
B. A moderate positive relationship, but the direction of causality is ambiguous
C. No meaningful relationship exists between the two constructs
D. Performance causes satisfaction, not the reverse
Page 1
,Answer: B
Rationale: The correlation of ~0.30 is moderate. While the happy-productive worker thesis
suggests satisfaction leads to performance, longitudinal studies show reciprocal causation.
Therefore, the relationship exists but is not strong, and causal direction is not settled by
correlation alone.
4. In a Six Sigma DMAIC project, the phase in which a cause-and-effect matrix is typically
used to prioritize potential root causes based on their impact on critical-to-quality
characteristics is:
A. Define
B. Measure
C. Analyze
D. Improve
Answer: C
Rationale: The cause-and-effect matrix (or C&E matrix) is a tool used in the Analyze phase to
identify and prioritize input variables (potential causes) that have the strongest relationship with
the output (CTQ). It helps focus the subsequent data collection and hypothesis testing.
5. In Porter's five forces framework, the threat of substitutes is considered high when:
A. Substitutes offer a comparable performance at a lower price
B. Buyers have low switching costs to the substitute
C. Both A and B are true
D. Substitutes are produced by firms in the same industry
Answer: C
Rationale: Substitutes limit industry profitability by placing a ceiling on prices. The threat is
greatest when substitutes provide an attractive price-performance trade-off and when buyers can
switch easily (low switching costs). Both conditions together intensify competitive pressure.
6. A firm operates in a monopolistically competitive market and faces a demand curve that
is highly elastic. To maximize profit, the firm should most likely pursue which pricing
strategy?
A. Price skimming with a high initial price
B. Penetration pricing with a low price to capture market share
C. Cost-plus pricing based on average total cost
D. Bundling multiple products together
Answer: B
Rationale: When demand is highly elastic, consumers are very sensitive to price changes. A lower
price can generate substantial volume increases, leading to higher total revenue and potentially
higher profit if variable costs are low. Penetration pricing aligns with this elasticity condition.
Page 2
, 7. A manager decides to lay off 10% of the workforce to improve profitability and avoid
bankruptcy, reasoning that the pain of a few is outweighed by the benefit to many
(remaining employees, shareholders, and creditors). This ethical reasoning aligns most
closely with:
A. Deontological ethics (Kantianism)
B. Utilitarianism
C. Virtue ethics
D. Justice-based ethics (Rawls)
Answer: B
Rationale: Utilitarianism holds that an action is right if it promotes the greatest good for the
greatest number. The manager's justification explicitly weighs the overall net benefit, making
this a utilitarian approach. Deontology would focus on duties or rules, not consequences.
8. In a multiple linear regression model predicting annual sales (in millions of dollars) from
advertising spend (in millions) and price (in dollars), the coefficient for price is -0.5 with a
p-value of 0.003. Assuming the model is correctly specified, the correct interpretation is:
A. A one-dollar increase in price is associated with a $0.5 million decrease in sales, on average,
holding advertising constant
B. A one-dollar increase in price causes a $0.5 million decrease in sales
C. A one-million-dollar increase in advertising is associated with a $0.5 decrease in price
D. The price coefficient is statistically insignificant at the 5% level
Answer: A
Rationale: In multiple regression, coefficients reflect the average change in the dependent
variable for a one-unit change in the predictor, holding other predictors constant. Since the
p-value is <0.05, the effect is statistically significant. Option B incorrectly asserts causality
without experimental evidence.
9. A company uses relative performance evaluation (RPE) in its executive compensation
plan, tying bonuses to the firm's stock return relative to a peer group index. The primary
advantage of RPE over absolute performance measures is that RPE:
A. Simplifies the compensation contract and reduces administrative costs
B. Filters out common market or industry shocks from the evaluation
C. Ensures executives are paid for absolute stock price increases
D. Eliminates the need for a compensation committee
Answer: B
Rationale: RPE removes the effect of factors outside managers' control (e.g., macroeconomic
trends, industry-wide demand shifts), so compensation better reflects managerial effort and skill.
This improves the incentive alignment and risk-sharing properties of the contract.
Page 3
Answers | 2026 Update | 100% Correct - LSUS
1. Two mutually exclusive projects have the following characteristics: Project A has a
higher IRR but a lower NPV (at the firm's cost of capital) compared to Project B. The
projects have different scales and timing of cash flows. According to standard capital
budgeting theory, which project should be accepted?
A. Project A, because IRR is the preferred metric for mutually exclusive projects
B. Project B, because NPV is the preferred metric for mutually exclusive projects
C. Either project, as the conflict indicates the projects have equal economic value
D. Neither project; the firm should seek projects with both higher NPV and IRR
Answer: B
Rationale: NPV directly measures the increase in firm value and correctly handles scale and
timing differences. IRR can be misleading for mutually exclusive projects due to the reinvestment
rate assumption and scale effects. Therefore, the project with the higher NPV should be chosen.
2. A luxury brand known for exclusivity and high quality considers launching a mid-range
product line. Brand extension research suggests that if consumers perceive the extension as
incongruent with the parent brand's image and of lower quality, the most likely outcome
for the parent brand is:
A. Enhanced brand image due to increased market reach
B. No significant change in brand equity
C. Dilution of brand equity, especially if the extension is high-profile
D. Strengthening of brand loyalty among existing customers
Answer: C
Rationale: Classic brand extension literature (e.g., Aaker, Loken) shows that incongruent
extensions perceived as lower quality can dilute parent brand associations through a process of
'dilution effect'. This is particularly risky for luxury brands extending downward.
3. A meta-analysis of the relationship between job satisfaction and job performance found
a corrected correlation coefficient of approximately 0.30. This finding is best interpreted
as:
A. A strong causal effect of satisfaction on performance
B. A moderate positive relationship, but the direction of causality is ambiguous
C. No meaningful relationship exists between the two constructs
D. Performance causes satisfaction, not the reverse
Page 1
,Answer: B
Rationale: The correlation of ~0.30 is moderate. While the happy-productive worker thesis
suggests satisfaction leads to performance, longitudinal studies show reciprocal causation.
Therefore, the relationship exists but is not strong, and causal direction is not settled by
correlation alone.
4. In a Six Sigma DMAIC project, the phase in which a cause-and-effect matrix is typically
used to prioritize potential root causes based on their impact on critical-to-quality
characteristics is:
A. Define
B. Measure
C. Analyze
D. Improve
Answer: C
Rationale: The cause-and-effect matrix (or C&E matrix) is a tool used in the Analyze phase to
identify and prioritize input variables (potential causes) that have the strongest relationship with
the output (CTQ). It helps focus the subsequent data collection and hypothesis testing.
5. In Porter's five forces framework, the threat of substitutes is considered high when:
A. Substitutes offer a comparable performance at a lower price
B. Buyers have low switching costs to the substitute
C. Both A and B are true
D. Substitutes are produced by firms in the same industry
Answer: C
Rationale: Substitutes limit industry profitability by placing a ceiling on prices. The threat is
greatest when substitutes provide an attractive price-performance trade-off and when buyers can
switch easily (low switching costs). Both conditions together intensify competitive pressure.
6. A firm operates in a monopolistically competitive market and faces a demand curve that
is highly elastic. To maximize profit, the firm should most likely pursue which pricing
strategy?
A. Price skimming with a high initial price
B. Penetration pricing with a low price to capture market share
C. Cost-plus pricing based on average total cost
D. Bundling multiple products together
Answer: B
Rationale: When demand is highly elastic, consumers are very sensitive to price changes. A lower
price can generate substantial volume increases, leading to higher total revenue and potentially
higher profit if variable costs are low. Penetration pricing aligns with this elasticity condition.
Page 2
, 7. A manager decides to lay off 10% of the workforce to improve profitability and avoid
bankruptcy, reasoning that the pain of a few is outweighed by the benefit to many
(remaining employees, shareholders, and creditors). This ethical reasoning aligns most
closely with:
A. Deontological ethics (Kantianism)
B. Utilitarianism
C. Virtue ethics
D. Justice-based ethics (Rawls)
Answer: B
Rationale: Utilitarianism holds that an action is right if it promotes the greatest good for the
greatest number. The manager's justification explicitly weighs the overall net benefit, making
this a utilitarian approach. Deontology would focus on duties or rules, not consequences.
8. In a multiple linear regression model predicting annual sales (in millions of dollars) from
advertising spend (in millions) and price (in dollars), the coefficient for price is -0.5 with a
p-value of 0.003. Assuming the model is correctly specified, the correct interpretation is:
A. A one-dollar increase in price is associated with a $0.5 million decrease in sales, on average,
holding advertising constant
B. A one-dollar increase in price causes a $0.5 million decrease in sales
C. A one-million-dollar increase in advertising is associated with a $0.5 decrease in price
D. The price coefficient is statistically insignificant at the 5% level
Answer: A
Rationale: In multiple regression, coefficients reflect the average change in the dependent
variable for a one-unit change in the predictor, holding other predictors constant. Since the
p-value is <0.05, the effect is statistically significant. Option B incorrectly asserts causality
without experimental evidence.
9. A company uses relative performance evaluation (RPE) in its executive compensation
plan, tying bonuses to the firm's stock return relative to a peer group index. The primary
advantage of RPE over absolute performance measures is that RPE:
A. Simplifies the compensation contract and reduces administrative costs
B. Filters out common market or industry shocks from the evaluation
C. Ensures executives are paid for absolute stock price increases
D. Eliminates the need for a compensation committee
Answer: B
Rationale: RPE removes the effect of factors outside managers' control (e.g., macroeconomic
trends, industry-wide demand shifts), so compensation better reflects managerial effort and skill.
This improves the incentive alignment and risk-sharing properties of the contract.
Page 3
